Tom Armistead's  Instablog

Tom Armistead
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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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Tom Armistead's Instablog
  • Reacting To Cisco's Guidance: DooDoo Occurs 4 comments
    Nov 15, 2013 7:22 AM | about stocks: CSCO

    Not long after I submitted my article on screening for excess current assets, in which I mention my recently opened position in Cisco (NASDAQ:CSCO), the company announced earnings, and more importantly, gave shockingly bad guidance. Shares tanked by about 12%.

    I suppose I could have pulled the article, rewritten it to make the quick hit from the Cisco position less prominent, and resubmitted. For that matter, I could have just sort left it out. But I'm writing about what actually happens, and as we all know, shit happens.

    The position I had was a vertical call spread, long Jul 2014 19 calls and short Jul 2014 23 calls. When the stock tanked, I did what I normally do on these situations, which was to roll the long call down from 19 to 17, at a net debit of $1.60. The effect is to lower the breakeven on the trade by 40 cents, while accepting another $2 downside exposure.

    This Chinese espionage thing is ridiculous. Not that long ago we were periodically catching them spying on us and on our major corporations, electronic espionage, over the internet. Now it turns out we do the same thing, and they become indignant, or fearful, or self-righteous, or some combination of the above.

    The reality is, that for certain applications, any fool knows to use something that was made in his home country, if at all possible. I don't know how this precept works on the cloud, or in the cloud. They'll sort it out, given enough time.

    As for the decline in set-top box revenue, that's not really the kind of business Cisco should be in, I'm pretty sure the market was discounting it anyway.

    Brett Jensen opines that Cisco is always doing this, about once a year they issue some horrendous guidance, or paint some gloomy picture, tanking the whole sector. Then things look up, somehow, and the stock recovers. Meanwhile they've bought back umpteen shares.

    As mentioned in the article, Cisco has excess current assets, which retain their value even if future income decreases. So revenue for the next quarter will be down 8% to 10%, and the shares go down 12%? The cash didn't go down 12%, and there's a lot of it. There is also the question, whether the reduction in revenue is permanent, or just a speed bump.

    Getting back to the vertical call spread: it was in the money when I bought it. The bet was, the stock won't go down more than a certain small amount. Effectively, I sold a put, while maintaining wiggle room and reducing risk.

    I'll hold.

    Disclosure: I am long CSCO.

    Stocks: CSCO
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Comments (4)
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  • pemdas1
    , contributor
    Comments (263) | Send Message
    Honesty and integrity. Rare and much appreciated.
    15 Nov 2013, 10:24 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6225) | Send Message
    Author’s reply » Thank you kind sir.
    15 Nov 2013, 04:23 PM Reply Like
  • Robin Hewitt
    , contributor
    Comments (5631) | Send Message
    Thanks for the article, Tom. I always learn something new from you. It's smart to have a strategy if things go south. Been watching Cisco a while now as the company seeks to reposition. I'm not convinced they have a solid forward strategy so I've stayed away. But if it drops to 20-ish again near term, I'll likely sell puts. I like market overreactions.
    16 Nov 2013, 02:34 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6225) | Send Message
    Author’s reply » I will be closing out the vertical call spread today, with an IRR of 55%, can't complain. Rolling down added to the profit.


    I haven't done any further analysis on CSCO, it seems like "big tech" is now replacing "old tech" as the buzzword, probably fully valued at this point.
    2 Jul 2014, 07:13 AM Reply Like
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