Cisco (NASDAQ: CSCO) has appeared to find favor with the stock market again as analysts have found opportunity for the company's markets to grow. As the headwinds change to tailwinds, the stock provides a good opportunity for an income play. Let's take a look at what others are saying about the stock and the play.
Analysts are Bullish on Cisco
Goldman Sachs has a $24.00 price target on the stock and sees a possible 40% upside. It did an IT survey and found "stronger than expected" growth opportunity in enterprise networking, switching in particular, and a stronger competitive position for Cisco. In the survey, 58% of IT executives considered themselves most likely to deploy Cisco's switching architecture, putting the company in a strong position against competitors like Juniper Networks Inc. (JNPR). Piper Jaffray also believes that the fundamentals at Cisco are improving. They are of the opinion that Cisco will meet or slightly beat revenue expectations while at the same time the company's cost cutting efforts maybe help drive better than expected EPS results. They have a price target of $22.
Wall Street loves CSCO again?
The stock has grown quite a bit from the long recent fall and it appears that investors appear more positive about the stock even though it remains vulnerable to economic uncertainty like most companies. The considerable demand for internet traffic shifting to the cloud will allow Cisco to capitalize on the demand for networking gear this second half of 2012 and into the future. Another point of opportunity for the company is the rising interest in telecommunications gear that is expected to rebound the second half of the year.
Cisco management has focused on restructuring to reduce costs and run a leaner operation. Analysts believe that this (with the recent opportunities) will pay off for the company. Caris & Co. analyst John Slack said in a note to clients, wrote this:
A combination of "solid execution and conservatism should allow the shares to recover with service provider and IT spending in the back half of the year. The company is on track for its sixth year of revenue growth in the past seven years. Earnings per share are forecast to have risen for the fifth time in seven years. (Cisco Systems' fiscal year runs from August to July.)
Technically Speaking
Cisco has been moving sideways since its huge drop in early May. It has been trading between 14.93 and 17.66. Just recently it had a nice swing up. It will find resistance at about 18.5 to be difficult. If we observe the RSI, we may note that the lower drop in July (which was lower than the one in May) proved to have less strength and this means it also had the opportunity to have a better upside which we are seeing now. The MACD is also not revealing anything to us we cannot see on the stock chart. If we look at this from a short term perspective, it looks like the stock will have to slow down soon because it has risen too fast. It cannot keep that pace up as it rears its head through the upper Bollinger band. But, how far back it will come is still a question.
The Option Play
The stock is presently trading at 17.48 and I agree with some observations that the stock may remain range bound for a period of time despite some bullish leans by analysts. For this reason I am looking at playing a Bear Put Spread on a pullback by the stock.
- Buy the November 2012 put with a strike of '17' (priced at $0.92)
- Sell the November 2012 put with a strike of '16' (priced at $0.55)
- Net Debit to Start: $0.37
- Maximum Profit: $0.63
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the Trade
- The stock has risen so fast, it needs a time to rest. Perfect pullback opportunity.
- I believe the stock is in this trading range.
- 4 months gives it time to move.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
