Where Is Cisco Heading After Rough Quarter Earnings?

This marks the sharpest decline in market activity since the March 2020 pandemic sell-off.

While it’s been all-hands-on-deck in the greater Wall Street, investors and traders rush to shed off lightweight stocks and dump equities as fears loom over another Fed rate hike, rampant inflation, and economic slowdown.

The downturn in Cisco’s earnings is a broad combination of China’s Zero Covid lockdown regulations, geopolitical tension between Russia and Ukraine, and slowing sales in the consumer market, as many are cutting back on frequent spending as prices have soared to their highest in more than four decades.

These events outside of Cisco’s control have spooked off investors, and for 2022, CSCO prices have come down as much as 33.95%.

In its earnings report, the company said that sales would decline by 1% to 5.5% for this quarter, with analysts’ predictions standing at 6% for the period.

According to its share earnings, prices per share adjusted were $0.87 per share against the $0.86 per share predicted. Revenue was down to $12.84 billion versus the $13.34 billion some analysts penned.

Even with these numbers, investors are still not convinced that the upcoming quarter will see Cisco outperform Wall Street’s estimates.

Is Cisco feeling the cold for conditions outside of its control?

For starters, the company managed to cut ties with Russia after the country invaded Ukraine earlier in the year. More so, Cisco also stopped its business in Belarus, an ally of Russia. These three countries make up roughly 1% of total sales but saw the company take a $200 million decline in revenue.

Then the Zero Covid lockdowns in China added even more strain to an already tight supply chain, which cost the company an additional $300 million in revenue. China is set to reopen on June 1, but executives of the company are not quite sure how fast supply chain constraints will be resolved once the country finally reopens.

Many are also concerned over the fact that consumers have also drawn back on spending, as inflation has hit record high numbers in recent months.

Although this is a key factor that holds some investors off, the company mentioned that the top line figures are set to grow in the coming quarter, as smaller consumer sales have been increasing even in tight economic conditions.

Where is Cisco heading?

The upcoming quarter could reveal a different scenario, and that could Cisco on track to see share prices increase on the back of consumer orders and ongoing global sales increase.

Cisco also recently changed some of its policies, limiting customers, by not allowing them to cancel orders within 45 days of the committed shipping date.

This coupled with tightening its spending budget, and the recent no-cancellation policy helped sales jump by 19%. Perhaps this could be a win for Cisco in the coming quarter.

Then, in the hopes that supply chain constraints at ports in China are fully operational again by mid-summer, investors might shake off their negative sentiment over the broader market.

But supply chain constraints won’t be resolved during the summer, as the battle for cargo at ports and airports will be a tight one.

There’s still too much uncertainty surrounding the situation in Ukraine and Europe, for that matter.

It’s possible that Cisco could see several increases in its sales, but it might still take a lot before overall revenue could see positive growth. In terms of expansion, the changing lockdowns across the world have met the company with slower growth in this period, and perhaps over the summer months, a larger number of deals could give the company a boost.

The Takeaway

Cisco is perhaps right in the midst of a firestorm, as the broad market sentiment has hit its lowest since the early months of the pandemic.

Recent quarter earnings might’ve been lower than Wall Street predictions, but that’s mainly caused by occurrences outside of the company’s control.

There’s a slight chance that Cisco could be poised for positive growth in the next few months, and CSCO could perhaps move slightly north again as the company tightens its spending and looks to resolve issues that have been drawing them back.

Cisco Is Down By 13%, Here Is Why

Key Insights

  • Cisco reported weaker-than-expected fiscal Q3 results and offered disappointing guidance for fiscal Q4. 
  • The company noted that problems in Russia and lockdowns in China were the key drivers for weak performance. 
  • The market is worried that the slowdown of the global economy will hurt Cisco’s profits in the upcoming quarters. 

Cisco Stock Falls As Guidance Disappoints

Shares of Cisco gained strong downside momentum after the company released its fiscal Q3 report. Cisco reported revenue of $12.84 billion and adjusted earnings of $0.87 per share, missing analyst estimates on revenue and beating them on earnings.

In the next quarter, Cisco expects to report adjusted earnings of $0.76 – $0.84 per share. Revenue is expected to decline by 1% – 5.5% on a year-over-year basis. For the full fiscal year 2022, the company expects to report adjusted earnings of $3.29 – $3.37 per share.

Cisco said that it continued to see solid demand for its technologies and that its business transformation was progressing well. However, the market focused on the weak guidance, and the stock found itself under significant pressure.

What’s Next For Cisco Stock?

Analysts expected that Cisco will report earnings of $3.44 per share in the current fiscal year, so the company’s guidance was disappointing. In the next year, Cisco was expected to report earnings of $3.71 per share, and this estimate will be revised in the upcoming weeks.

The company said that demand was not a problem and added that lockdowns in China and problems in Russia were the key drivers for disappointing results and guidance.

However, the market is seriously worried about the slowdown of the global economy, so traders are extremely sensitive to bad news. As a result, Cisco stock declined to levels that were last seen back in November 2020.

It is not clear whether speculative traders will see this pullback as a buying opportunity. Cisco is trading at 11 forward P/E, but analyst estimates will move lower, and the broad pullback in the markets may add to pressure in the upcoming trading session.

To keep up with the latest earnings updates, visit our earnings calendar.

Stock Bulls Remain Optimistic As Data Indicates a Slowdown in Manufacturing Inflation

Stock bulls remain extremely cautious but a bit more optimistic as data indicates a slowdown in manufacturing inflation. The Producer Price Index rose +11% year-over-year in April, higher than expected but a meaningful pullback from March’s +11.5%. Producer prices lead consumer prices, so the report is a good sign overall, though investors, as well as the Fed, will need to see a couple more months of declines before declaring that inflation is indeed cooling.

Inflation

Economists also warn that goods inflation may be coming down because consumer demand is shifting more to services, meaning high prices could simply be moving from one part of the economy to another. The latest data shows services prices are rising at the fastest rate in three decades with airfare leading the way. Even if inflation has peaked, the question now is, how long will it remain elevated?

Federal Reserve Chair Jerome Powell cautioned yesterday that he can’t guarantee the central bank can deliver a so-called “soft landing” for the economy, pointing to the tight labor market and ongoing supply chain dislocations. Powell also stressed that other “huge events” are playing important roles right now, including Russia’s war in Ukraine, that are beyond the Fed’s control. Powell made the comments after being confirmed by the Senate for a second 4-year term.

The central bank’s target inflation rate is still a “flexible +2%” but several officials have indicated that the new normal might be more in the +2.5% to +3% range. One of the main gauges (but not the only one) the Fed uses to determine the rate of inflation is the Core PCE Prices Index, which for March was running at +5.2%. The April read is due out on May 27, which is a couple weeks ahead of the Fed’s next meeting on June 14-15.

Data to watch

Consumer data recently has been sending mixed signals that are hard to interpret. Sentiment has been mostly falling since the start of the year but consumer spending has not shown any signs of pullback.

Next week, investors get an update on how spending is holding up via April Retail Sales on Tuesday. A slew of fresh housing data next week will provide a deeper look at how substantially higher mortgage rates might be impacting the market. The NAHB Housing Market Index for May is out on Tuesday, followed by April Housing Starts on Wednesday, and April Existing Home Sales on Thursday.

Several key earnings are on the calendar next week as well, including Home Depot and Walmart on Tuesday; Cisco, Lowe’s, Target, and TJX Companies on Wednesday; Applied Materials, Palo Alto Networks, and Ross Stores on Thursday; and Deere & Co. on Friday.

Cisco Trading Lower After Citi Downgrade

Dow component Cisco Systems Inc. (CSCO) is trading lower by 2.5% in Tuesday’s pre-market after a major investment bank issued a ‘Sell’ rating on the stock, lowering the price target to $45. The bearish call matches a slow deterioration in sentiment, even though the networking giant is expected to match last year’s quarterly performance when fiscal Q3 2022 earnings are released on May 18th. The selloff has dropped the stock within a few pennies of November’s low near 51.

Chronic Supply Chain Issues

The stock jumped more than 3% in February after beating Q2 earnings-per-share (EPS) expectations, increasing the dividend by 3%, and announcing a new $15 billion buyback program. However, it topped out in the next session and fell into a consolidation pattern that broke to the downside in Monday’s session.  A Wells Fargo downgrade in March didn’t help bearish sentiment, which has been further compromised by soaring inflation and the Russia – Ukraine war.

Citigroup analyst Jim Suva downgraded the stock to ‘Sell’ from ‘Neutral’ ahead of the opening bell, lowering the firm’s price target while insisting that “current supply chain challenges are more of a headwind for Cisco than for the company’s peers”. However, as he also notes “We emphasize that there are no financial cash flow or going concern issues with Cisco; we simply believe that the stock will trade lower due to valuation multiple compression with inventory issues and share losses.”

Wall Street and Technical Outlook

Wall Street consensus has now dropped to an ‘Overweight’ rating based upon 10 ‘Buy’, 3 ‘Overweight’, and 16 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $54 to a Street-high $72 while the stock is set to open Tuesday’s session about $3 below the low target. This dismal placement highlights a major disconnect with skeptical Main Street investors.

Cisco Systems hit an all-time high at 82 in 2000 and fell to 8.12 when the Internet bubble broke. It’s traded within those boundaries for the last two decades. The slow motion uptrend after buyers returned in 2011 topped out in the upper 50s in 2019, ahead of a December 2021 breakout that ended within two points of the .786 Fibonacci selloff retracement level at year’s end. The stock failed the breakout at the start of 2022 and has incurred a 19% year-to-date loss that’s likely to get much wider in coming months.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Big Money Believes in Cisco

And the technology giant could bounce higher due to more businesses moving to the cloud. But another likely reason is Big Money lifting the stock.

So, what’s Big Money? Said simply, that’s when a stock goes up in price alongside chunky volumes. It’s indicative of institutions betting on the shares.

Smart money managers are always looking for the next hot stock. And Cisco has many fundamental qualities that are attractive.

This sets up well for the stock going forward. But how the shares have been trading points to more upside. As I’ll show you, the Big Money has been consistent in the shares.

You see, fund managers are always looking to bet on the next outlier stocks…the best in class. They spend countless hours sizing up companies, reading reports, speaking to analysts…you name it. When they find a company firing on all cylinders, they pounce in a big way.

That’s why I’ve learned how critical it is to gauge Big Money demand for shares. To show you what I mean, have a look at all the Big Money signals CSCO has made the last year.

The last six months or so have seen Big Money activity, too. Each green bar signals big trading volumes as the stock ramped in price:

Source: www.mapsignals.com

In the last year, the stock attracted 17 Big Money buy signals. Generally speaking, recent green bars could mean more upside is ahead.

Now, let’s check out technical action grabbing my attention:

Outperformance is important for leading stocks.

Next, it’s a good idea to check under the hood. Meaning, I want to make sure the fundamental story is strong too. As you can see, Cisco has been growing earnings at huge rates and is profitable. Take a look:

  • 3-year EPS growth rate (+4,348.5%)
  • Profit margin (+21.3%)

Source: FactSet

Marrying great fundamentals with technically superior stocks is a winning recipe over the long-term.

In fact, CSCO has been a top-rated stock at my research firm, MAPsignals, for years. That means the stock has buy pressure, strong technicals, and growing fundamentals. We have a ranking process that showcases stocks like this on a weekly basis.

CSCO has a lot of qualities that are attracting Big Money. It’s made this list eight times since 2009, with its first appearance on 08/03/2009…and gaining 243.73% since. The blue bars below show the times that Cisco was a top pick.

Source: www.mapsignals.com

It’s been a top stock in the technology sector according to the MAPsignals process. I wouldn’t be surprised if CSCO makes additional appearances in the years to come. Let’s tie this all together.

The Bottom Line

The Cisco rally could have further to go. Big Money buying in the shares is signaling to take notice. Shares could be positioned for further upside, and it pays a current 2.7% dividend. Given the historical gains in share price and strong fundamentals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: the author holds long positions in CSCO in managed accounts at the time of publication.

Learn more about the MAPsignals process here.

Contact

https://mapsignals.com/contact/

What Moves the Stock Market This Week?

A new 40-year high read on consumer inflation last week now has Wall Street thinking the Fed might be even more aggressive with rate hikes. At the same time, investors continue to closely monitor the geopolitical headlines involving Russia and Ukraine. From what I’ve heard, there were a lot of diplomatic phone calls over the weekend, including one between Biden and Putin, but nothing seems to have changed in regard to Putin’s “poker face”.

Political tensions

Some military insiders continue to warn that Russia could now invade Ukraine at a moment’s notice. Some are saying it happens this week while others say Russia will invade after the Winter Olympics.

To add even more worry and concern, several geopolitical groups are thinking Russia and China are somewhat collaborating on strategy. This isn’t really anything new but the “buzz” and rumors are starting to get louder.

The big what if… what if Russia was to make a move on Ukraine and China a move on Taiwan in a coordinated effort? I don’t really think that happens but there’s always a possibility. Perhaps a more worrisome theory is Russia and China working together on economic warfare strategies to knock the US dollar out of its leadership role as the world’s currency.

Russia has a good hold on energy supply and China is the world’s biggest influence on the global supply chain. If Russia can withhold energy and China slows the supply chain, theoretically they could create a major wave of inflation. If at the same time, they continued to dump US Treasuries in a big way they could weaken the US dollar enough to bring into question its role as the world’s reserve currency, especially with our debt level so elevated.

The theory continues… if the US dollar was to weaken enough some exporting countries and global businesses might start to question the value of their goods being sold at a discount when the transaction is settled in US dollars.

Hence more longer-term economic concern.

Interest rate hikes

More large Wall Street insiders are talking about perhaps +5 to +7 Fed rate hikes ahead in order to slow domestic inflation. The big questions remain… how fast will the Fed shrink its balance sheet and how long before they will stop raising interest rates? St. Louis Fed President Bullard last week expressed support for a 50-basis points hike, though several other Fed officials have since argued against the idea.

Fed speculation has also brought increased volatility to bond markets with yield on the 10-Treasury topping 2% on Thursday but ending Friday a full 10-basis points lower. The 2-year yield saw its biggest one-day move since 2009, surging 26 basis points at one point on Thursday. Those are pretty dramatic swings for bond markets and highlights the extreme level of uncertainty that is plaguing financial markets.

Just keep in mind however, from the summer of 2016 to the fall of 2018, 10-year Treasury yields jumped from 1.4% to over +3.0% yet the NASDAQ was still able to increase by over +45%.

On the energy front, there continues to be talk of tighter global oil supply and higher prices ahead especially if we see military action between Russia and Ukraine. Remember, increased energy costs can quickly spread through an entire economy as manufacturers pass along higher production and transportation costs in the form of higher consumer prices. Consumers also get dinged at the gas pump as well as with higher heating and cooling costs.

With inflation already smoking hot at +7.6% and Consumer sentiment starting to waiver the market is starting to get more nervous about higher energy costs. Worsening consumer sentiment can be an early warning signal of a decline in consumer spending. However, bulls still largely expect a boost in consumer spending as the Omicron Covid wave continues to fade, pointing to the massive amount of savings and increased asset values that consumers have accumulated over the past couple of years.

Most believe that spending will shift more toward “services” and away from goods, which in turn is expected to help further ease some of the strain on supply chains and start to cool prices. Supply chains have shown slow but steady improvements, especially in the last couple of weeks as Covid cases have plunged, which most economists think will should start slowing the rate of monthly inflation gains.

By March, inflation reads will be up against much higher year-ago data which should also help to bring down the rate of monthly increases, at least in theory. And if inflation starts showing signs of coming down on its own, that would likely decrease pressures on the Federal Reserve to resort to more aggressive tactics to tame inflation.

There is no major economic data today but investors are anxious about the Producer Price Index for January due out tomorrow. The bigger economic headlines this week include inflationary data out of China and US retail sales on Wednesday morning.

The Fed FOMC minutes are also being released Wednesday afternoon. The earnings this week include Airbnb and Roblox on Tuesday; Cisco, Nvidia, and Shopify on Wednesday; Palantir and Walmart on Thursday; and Draft kings and John Deere on Friday.

Cisco Systems Under Pressure Ahead of Report

Dow component Cisco Systems Inc. (CSCO) reports fiscal Q2 2022 earnings after Wednesday’s closing bell, with analysts expecting a profit of $0.81 per-share on $12.66 billion in revenue. If met, earnings-per-share (EPS) will mark a $0.02 increase compared to the same quarter last year. The stock fell more than 5% in November after the company lowered Q2 revenue guidance due to ongoing supply disruptions.  It bounced off the low into December, topping out at a 21-year high.

Spending Cuts Worry Analysts

The networking giant then failed a breakout above the 2019 peak in the upper 50s, dropping into a test at the 200-day moving average in the low 50s. Analysts are worried the company is pulling back on IT spending, which raises red flags because the metric correlates with enterprise and commercial sales strength. However, it’s possible that strong demand for the flagship Catalyst 9000 hardware products and campus networking could cancel out those pockets of weakness.

Goldman Sachs analyst Rod Hall downgraded the stock to ‘Neutral’ from ‘Buy’ in January, hoping that Cisco clarifies the cutbacks in this week’s report. He concedes that order backlogs are at an all-time high but believes that “order growth is more important and that orders could slow and IT spending trends weaken”. He then adds “an order trajectory change and accompanying commentary on demand would likely be more important for Cisco’s stock than would backward-looking backlog clearance”.

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 11 ‘Buy’, 3 ‘Overweight’, 13 ‘Hold’, and no ‘Sell’ recommendations. Price targets currently range from a low of $54 to a Street-high $73 while the stock is set to open Monday’s session nearly $1 below the low target. This weak placement highlights continued Main Street caution about supply disruptions and the dampening impact of high inflation on big tech profits.

Cisco Systems posted an all-time high in the low 80s in 2000 and fell to a two-year low in 2002. It’s traded within those boundaries for the last two decades, finally turning higher in 2012. The subsequent uptick stalled within two points of the .786 Fibonacci selloff retracement level in December 2021, yielding a nasty distribution wave that could signal the end of the uptrend. The failed breakout above the 2019 high is doubly bearish in this context, requiring a rally above 58.25 to negate long-term sell signals.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

QQQ: The Downside Risks on the Nasdaq Seem Exaggerated

The performance of the Nasdaq now encompasses a higher degree of volatility as seen by the 5.5 to 9% corrections in the Invesco QQQ Trust (QQQ) which has now become the new normal in a macroeconomic environment where hawkish Fed hiking interest rates is seen as being unfavorable to high-valued and unprofitable tech stocks.

Source: Initial chart from Trading View

For investors, QQQ tracks the Nasdaq-100 Index which features Apple (APPL), Alphabet A (GOOGL), Alphabet C (GOOG), Microsoft (MSFT), NVIDIA (NVDA), Meta labs (FB), Amazon (AMZN), Tesla (TSLA), Adobe (ADBE) and PayPal (PYPL). These are the main holdings out of a total of 102.

Assessing the risks

There are certainly risks in 2022 in the context of being invested in tech equities, but, I would like to bring to the attention of investors that despite all the volatility, QQQ has gained 6%, and this shows that the market’s repositioning (amid the rotation from growth to value names) does not seem commensurate with the forthcoming pace at which interest rates will increase.

Exploring further, trades are no longer crowded as in 2021 as people look for income or other asset classes to diversify. However, this diversification away from tech seems not to have hit QQQ’s main holdings which constitute 52.73% of the portfolio. As per my observation, this has been the case from April through December this year when most of the market gains were just from AAPL, MSFT, NVDA, TSLA, and GOOGL.

Source: Ycharts.com

Given the fact that the rotation has lacked in breadth, I see the corrections in tech as a rather muted market reaction, and this also prompts me to discard fears that tech stocks will suffer in the same way as during the bursting of the Internet bubble back in 1999-2000. At that time, in the first phase of the bear market, the large-caps names were doing fine but a large percentage of Nasdaq’s other components crashed by more than 50%. Ultimately, all the components crashed.

However, that was a completely different Nasdaq with the top stocks of the time being Cisco (CSCO) followed by Microsoft then Intel (INTC), or from the networking, software and semiconductor sectors respectively. Today, it is more about social media, online advertisement, internet marketplaces, electric cars, the cloud, smartphones, and virtual reality. In short, tech is now fully integrated into all spheres of economic and social life compared to twenty-two years ago.

Considering the inflation factor

Moderating slightly, QQQ’s other holdings seem to be impacted as investors become more selective, putting more emphasis on quality (free-cash-flow, balance-sheet, economic moat, etc) and valuations. Still, here also, rising inflation, currently at above 7% compared to 3.75% in 1999-2000 could prove to be more difficult for value stocks like banks as their customers suffer from rising prices and are faced with the rising cost of doing business. For this matter, as shown in the chart below, Bank of America (BAC) and Berkshire (BRK.B) saw a more pronounced dip in their total return level in August 2008 than Apple or Microsoft when inflation was above 5%.

https://static.seekingalpha.com/uploads/2022/1/14/49663886-16421719831560977.png

Source: Ycharts.com

Industrials are also likely to suffer from soaring raw material and labor costs. As for tech, they should better withstand high inflation with their ability to make use of software, AI, and automation tools more rapidly than companies from other sectors of the economy. These tools enable them to reduce operating costs and better circumvent wage inflation. Examples are FinTechs like PayPal’s (one of QQQ’s current underperformers) ability to reduce money transfer fees for customers compared to traditional banks and companies making use of cloud-based collaboration instead of having to invest in costly infrastructure.

Tech should continue to outperform as digital transformation enablers

Furthermore, with relatively less dependency on physical interactions caused by variant-related uncertainty, tech stocks are less likely to see a reduction in profitability. Here, some will note that Apple’s revenue share from its App Store ecosystem is increasing more rapidly than for devices and Tesla is considered as an internet-of-cars company.

Historically, as shown in the chart below, big tech’s gross profit margins have either increased or remained constant during the last five years, which include 2021, a year characterized by rapidly rising inflation.

https://static.seekingalpha.com/uploads/2022/1/14/49663886-16421723117351067.png

Source: Ycharts.com

Thus, inflationary pressures grappling the economy as from 2022 is likely to put valuations on the backstage, with tech, especially the more profitable ones, likely to continue seeing positive returns. This said tech remains highly dependent on semiconductors, a sector that needs to be watched closely for some short term pain when some of the big names report earnings on the last week of January. Finally, looking at the performance of the Nasdaq in 2020 and 2021 when it gained 43.64% and 21.39% respectively, even a 10-12% gain in 2022 would put it in positive territory.

Disclosure: I am long Apple. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

HACK: Massive Opportunity Going Into 2022

When you compare the performance of cyber security ETFs to their technology heavyweights like Invesco QQQ ETF (QQQ) or the Technology Select Sector SPDR ETF (XLK), it becomes evident that Wall Street is probably underestimating the potential of the cybersecurity industry in 2022. For the sake of this comparison, I considered the ETFMG Prime Cyber Security ETF (HACK) and iShares Cybersecurity and Tech ETF (IHAK) as shown below, but there are others too.

https://static.seekingalpha.com/uploads/2021/12/27/49663886-1640601244360989.png

Source: tradingview

The above charts show that both the two cybersecurity ETFs have underperformed their technology peers by more than 20%, despite holding stocks that are active in the fight against network malware and computer viruses, similarly to biotechs like BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA) producing cures to address the coronavirus threat.

Now, antivirus companies have been around for years, even decades, but the problem is that the threat level has increased exponentially as from the end of 2020 when Microsoft’s (NASDAQ:MSFT) was hacked through the supply chains attack when hackers made use of SolarWinds(SWI)monitoring software. Moreover, as shown by the high degree of sophistication of the recent ransomware attacks impacting colonial pipeline where millions of dollars of ransom money had to be paid to attackers, there is the involvement of bad actors at the nation-state level.

This is synonymous with aggression against the U.S., thus prompting the Biden administration to come up with a Cybersecurity executive order in May literally “forcing” federal agencies to boost IT defenses. As a result, public institutions have started to increase related expenses.

As for private institutions, they are also at a higher degree of risk due to the rapid adoption of the cloud, with workloads now also residing on employees’ laptops at home, making them more vulnerable to hacking as they are less protected by centralized corporate firewalls. Hence, there are multiple threat vectors facing CIOs, with many large enterprises reassessing their approach to cybersecurity altogether.

Hence relative underperformance in 2021 and an escalated threat landscape have created a massive opportunity for well-positioned cyber security vendors with the right products and proposition. For this matter, companies that come to mind are Cisco (NASDAQ: CSCO), Palo Alto (NASDAQ:PANW), and Fortinet (NASDAQ:FTNT), with their sophisticated zero trust protection (“ZTP”) mechanism. ZTP, in a way, resolves the problem which cannot be solved by the more traditional perimeter fencing security where the corporation is protected assuming it to be functioning within four walls. This is far from being the case in the current decentralized/WFH environment. Exploring further, HACK holdings also include companies that provide IT security for a wide variety of purposes including desktop as well as their web infrastructures.

https://static.seekingalpha.com/uploads/2021/12/27/49663886-16406012442883983.png

Source: etfmg.com

Thinking aloud, unless you are prepared to invest in these individual stocks which implies tracking their performance on a regular basis, HACK provides you with the ability to invest in more than one, namely through an ETF. Another advantage is that it tracks the Prime Cyber Defense Index (PCYBERNR), which provides a benchmark for investors interested in tracking companies actively involved in providing cyber security technology and services. Its holdings also include companies involved in security protocols applied to private and public networks and mobile devices in order to provide integrity of data protection.

Along the same lines, the fund managers review holdings on a quarterly basis for eligibility purposes, with the weights (percentage of assets occupied by a holding) being reset accordingly.

Finally, nearly two years after the advent of Covid, many companies are still in the process of transforming their operations to optimize on the cloud paradigm and should subsequently increasingly focus on the security aspect as a lesser portion of IT workloads remains in corporate datacenters. For this purpose, HACK’s holdings should profit as part of the broader cyber security industry over the next ten years as the market size which was $183.34 billion in 2020 reaches $539.78 billion in 2030.

Calculating a target share price for the end of 2022, based on an appreciation of just 20%, HACK should reach $73.5-$74. This uptrend should however witness a lot of volatility as most cybersecurity names are considered as growth stocks and should be adversely impacted as inflation pressures continue to prevail in the first half of 2022.

 

What Fuels The Stock Market Now?

An outstanding earnings season and signs that economic activity are picking back up are clashing with unrelenting inflation, difficulty finding more labor, and continued supply chain logjams.

Inflation

Most insiders believe inflation has further to climb, though the consensus right now is calling for a peak around the beginning of Q2 next year. With big shopping holidays in the U.S. coming up, followed closely by Chinese New Year at the beginning of February 2022, shipping and transportation logjams aren’t expected to find much relief in the near-term.

Meaning inflation pressures will likely continue. How far inflation will climb as the severe supply chain dislocations drag on is a huge unknown. Some Wall street investors are concerned that the Fed might feel compelled to end its asset purchases and hike rates much sooner than expected if monthly inflation keeps accelerating.

What might be even more worrisome is the fear that some of these price increases could be more permanent in nature, so how much overall inflation will pull back in the long run is starting to become a bigger talking point.

Demand and supply chain

Supply chain insiders warn that many companies are front-loading inventories in an effort to avoid running out of critical materials, which could bite in the long run if demand suddenly drops off. A lot of manufacturers have also increased production capacity for products that currently face shortages. The risk is that once back orders are filled and demand retreats, stockpiling and excess production could result in an oversupply situation in some areas, along with much lower profits and total revenues.

Another worry right now is that demand starts to retreats due to the current inflationary environment especially with everyday items like food and gasoline costing substantially more. That has investors anxious to see the latest Consumer Sentiment read being released today which is expected to edge higher vs. last month.

Investors are closing tracking the inflation expectation gauges in the report as typically the higher those climb, the more consumers tend to pull back on spending.

Data to watch next week

Looking towards next week, the economic data flow picks up with key releases including Empire State Manufacturing on Monday; Retail Sales, Import/Export Prices, Industrial Production, Business Inventories, and the NAHB Housing Market Index on Tuesday; Housing Starts and Building Permits on Wednesday; and the Philadelphia Fed Index on Thursday.

On the earnings front, Q3 reporting is just about wrapped up with companies in the S&P 500 index reporting revenue growth of more than +17%, the second highest on record behind only Q2 2021’s growth of over +25%, according to FactSet. Earnings themselves are on track to exceed +40%. AstraZeneca is today’s earnings highlight. Earnings next week include several big retailers which will provide some more clues as to how consumer demand is trending as well as updates on supply chain struggles. Investors are also keen to hear how holiday hiring is going.

Key earnings reports next week will include Advanced Auto Parts, Lucid, Tyson, and Warner Music on Monday; Home Depot and Walmart on Tuesday; Bath & Body Works, Cisco, Lowe’s, NVIDIA, Target, TJX, and Victoria’s Secret on Wednesday; Alibaba, Applied Materials, Intuit, Kohl’s, Macy’s, Palo Alto Networks, Ross Stores, and Williams Sonoma on Thursday; and The Buckle and Foot Locker on Friday.

Checking in on the geopolitical front, the U.S. is warning that Russia may be planning a full-scale invasion of Ukraine. U.S. officials say they’ve briefed their EU counterparts about concerns over a possible military operation, citing a buildup of Russian troops along the Ukraine border. Tensions are boiling still in Belarus and Russia is fanning the flames on that front as well.

SP500 commentary

ES ##-## (Daily) 2021_11_14 (1_49_54 AM)

The bearish accumulation divergence played very well last week. Moreover, the Advance Decline Line is weaker than the price is. It is also a negative factor in the short term. Potentially SP500 started the formation of the bull flag. Finding support at lower levels would be a great buying point with a target of 4800.

The major economic indicators are still bullish despite rising inflation. 4500 level is a psychological level bears will target if 4600 fails. Current levels can be considered only for intraday trading. At the same time, lower levels are needed to get a good risk/reward ratio for swing traders.

For a look at all of today’s economic events, check out our economic calendar.

Cisco Systems Fairly Valued Ahead of Report

Dow component Cisco Systems Inc. (CSCO) reports fiscal Q4 2021 earnings after Wednesday’s closing bell, with analysts expecting a profit of $0.83 per-share on $13.03 billion in revenue. If met, earnings-per-share (EPS) will mark a slight improvement compared to the same quarter last year. The stock closed marginally higher in May after meeting Q3 estimates and issuing mixed Q4 guidance. The company has met EPS guidance every quarter in the last five years so a downside surprise isn’t likely.

Strong 2021 Returns

Cisco underperformed throughout 2020, with contracts in the Commercial, Public Sector, and Service Provider segments impacted by the pandemic. Bulls have returned in force so far in 2021, underpinning a 25% year-to-date return. Even so, the stock is still trading below July 2019’s multiyear high at 58.26, which marks major resistance. A breakout after the news isn’t likely, given the proximity to that peak and the company’s reputation as a slow mover.

It’s been a relatively quiet quarter for the networking giant, with the recently reported acquisition of Israeli start-up Epsagon marking one of the few notable highlights. The transaction, valued at $500 million, will add to Cisco’s capability in the cloud space. It also won an open-ended $1.2 billion contract from the Defense Information Systems Agency to provide Smart Net Total Care and Software Support Services for the Department of Defense.

Wall Street and Technical Outlook

Wall Street consensus has improved in the last three months, now standing at an ‘Overweight’ rating based upon 14 ‘Buy’, 3 ‘Overweight’, and 13 ‘Hold’ recommendations. No analysts are recommending that shareholders underweight or close positions. Price targets range from a low of $46 to a Street-high $65 while the stock will open Wednesday’s session just $1 below the median $57 target. This placement suggests Cisco is fairly valued, lowering odds for big price change after the report.

Cisco Systems posted an all-time high at 82 in 2000 and has traded below that peak for the last 21 years. A multiyear uptrend topped out in the upper 50s in 2019, giving way to a pullback that accelerated to a two-year low during the pandemic decline. The stock posted a higher low in November and bounced strongly, reaching within three points of the prior peak this week. An extension into resistance is possible after the report but additional gains may take time to unfold.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Cisco Shares Slip After Earnings Guidance Disappoints

Shares in IT networking giant Cisco Systems, Inc. (CSCO) plunged over 5% in Wednesday’s extended-hours trading session after the company disappointed investors with its earnings guidance for the current quarter amid ongoing chip supply disruptions.

Management sees fiscal fourth quarter (Q4) earnings ranging between 81- and 83 cents, with revenue growth of 6% to 8%. Wall Street had expected EPS of 85 cents and 5.5% revenue growth. “We’re also seeing similar component shortage supply issues as our peers,” Cisco CEO Chuck Robbins said, per MarketWatch. “The good news, and this is reflected in our guidance, is that we are confident we will work through this as we have already put in place revised arrangements with several of our key suppliers,” he added.

Other key metrics came in ahead of forecasts. The company reported Q3 adjusted earnings of 83 cents per share versus a consensus of 82 cents a share. Meanwhile, revenues of $12.80 billion topped analysts’ expectations of $12.56 billion. On a year-over-year (YoY) basis, the top and bottom line grew 6.6% and 5%, respectively.

Through Wednesday’s close, Cisco stock has a market value of $221.52 billion, offers a 2.8% dividend yield, and trades 17.63% higher over the past twelve months. Year to date (YTD), the shares have added 17.25%, outperforming the tech-heavy Nasdaq index by 14% over the same period. Valuation-wise, the stock trades at 15.48 times forward earnings, slightly above its five-year average multiple of 14.44 times.

Wall Street View

After the company’s quarterly earnings, Deutsche Bank analyst Matthew Niknam initiated coverage of the stock with a Hold rating and $55 price target. Niknam says Cisco “screens attractively from several angles” but offers limited upside against consensus estimates. The analysts also noted the stock trades at a premium on a standalone and industry bias.

Coverage elsewhere on Wall Street remains mostly bullish. The stock receives 14 ‘Buy’ ratings, 3 ‘Overweight’ ratings, and 1 ‘Sell’ rating. Currently, no broker recommends selling the shares. Twelve-month price targets range from a Street-high $65 to a low of $45, with the median pegged at $55.

Technical Outlook and Trading Tactics

Cisco shares have trended steadily high since late October, with only one sizeable retracement to the 50-day simple moving average (SMA) in early March. More recently, however, a dark cloud cover pattern formed on the chart, indicating short-term weakness.

Traders and investors should view earnings-related selling pressure as a buying opportunity if the price holds the $48 level where it finds support from a multi-month horizontal trendline.

For a look at today’s earnings schedule, check out our earnings calendar.

Cisco Shares Slump Over 5% as Revenue Disappoints

Cisco Systems’ revenue declined year-on-year basis for the fifth consecutive times in the second quarter of the fiscal year 2021 as demand for office equipment fell due to extended work-from-home during the COVID-19 pandemic, sending its shares down over 5% in extended trading on Tuesday.

The world’s leading provider of IP-based networking solutions and services said its total revenue dipped to $11.96 billion in the period ended January 23, 2021 from $12.01 billion seen in the same period a year ago. That was a bit higher than the Wall Street consensus estimate of $11.92 billion.

On the other hand, revenue from services business rose 2% to $3.39 billion. Cisco’s net income on a generally accepted accounting principles basis came in at $2.5 billion or $0.60 per share, and non-GAAP net income of $3.4 billion or $0.79 per share, beating the market expectations of $0.76 per share.

Cisco forecasts that GAAP EPS will be $0.64 to $0.69 and revenue to increase between 3.5% to 5.5% in the third quarter of fiscal 2021.

Cisco printed solid quarterly results and provided in-line guidance for April. The shares will likely to be softer tomorrow as some investors may have expected even better guidance in light of recently improving trends among other enterprise IT-exposed companies. We note that Cisco’s order patterns are improving versus a poor picture three months ago (although easier comps are helping),” said George C. Notter, equity analyst at Jefferies.

“Also, they continue to accelerate the move to software/subscription-based business models. The bigger picture – the business transformation/digitization trends that have been driving their business with Enterprises aren’t going away, even in a difficult economic environment.”

Cisco shares, which slumped about 7% in 2020, fell over 5% to $45.87 in extended trading on Tuesday.

Cisco Stock Price Forecast

Thirteen analysts who offered stock ratings for Cisco in the last three months forecast the average price in 12 months $49.89 with a high forecast of $60.00 and a low forecast of $41.00.

The average price target represents a 2.87% increase from the last price of $48.50. From those 13 analysts, six rated “Buy”, seven rated “Hold”, and none rate “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $54 with a high of $65 under a bull scenario and $33 under the worst-case scenario. The firm currently has an “Overweight” rating on the technology conglomerate’s stock.

Several other analysts have also recently commented on the stock. Jefferies raised the price target to $52 from $51. Citigroup upped the price target to $50 from $45. Credit Suisse increased the target price to $46 from $41. Piper Sandler raised the target price to $47 from $45. Oppenheimer upped the price target to $50 from $45.

Analyst Comments

Cisco (CSCO) reported a modest upside to our estimates in FQ1 driven by services and software, as demand slowly recovers. Enterprise remains the laggard but improving trajectory in commercial business a positive sign that demand positioned for recovery as employees return to work; remain OW,” said Meta Marshall, equity analyst at Morgan Stanley.

“Infrastructure revenue likely to recover as IT budgets stabilize. Diversification includes exposure to network modernization categories giving some growth offset to more challenged areas. Higher proportion of recurring sales limits downside volatility relative to previous cycles, but still not immune. Security/analytics capabilities should help Cisco stay important to IT budgets even as cloud transition accelerates. Security and applications growth (primarily inorganic) help improve margins of overall business. Cash flow offers meaningful flexibility.”

Check out FX Empire’s earnings calendar

U.S. Market Wrap and Forecast for Monday

January’s Non-Farm Payrolls report added 49,000 new jobs while the unemployment rate fell from 6.7% to 6.3%. December jobs were revised sharply lower, continuing a bleak employment scenario as the Western world works through the last stages of the winter’s second pandemic wave. The equity market yawned and bonds sold off after the news, squaring positions into the weekend so that short-term options market makers get paid.

Ford vs. Tesla

SP-500 Volatility Index (VIX) fell to the lowest low since early December. GameStop Inc. (GME) shareholders declared their loyalty in a widely read Reuters article, ready to become the bagholders of a new generation. Ford Motor Co. (F) CEO Jim Farley (no relation) declared the new Mustang Mach-E will compete successfully with Tesla Inc.’s (TSLA) Model Y, forgetting that brand is everything in the third decade of the new millennium.

Snap Inc. (SNAP) recovered after a 9% post-earnings decline, lifting to an all-time high. Fitness juggernaut Peloton Interactive Inc. (PTON) fell into the 140s despite beating top and bottom line estimates and raising first quarter guidance. The company has to compete with real fitness centers in coming quarters, lowering expectations about their vertical growth trajectory. Wynn Resorts Ltd. (WYNN) hit an 11-month high despite a 58.5% year-over-year revenue decline, offering shareholders an opportunity to get out with their capital still intact.

Heading into Monday

Fourth quarter earnings season draws to a close next week, with reports from Dow components Cisco Systems Inc. (CSCO) and Walt Disney Co. (DIS) as well as Twitter Inc. (TWTR), and General Motors Co. (GM). Disney is trading near an all-time high even though their wildly successful streaming service has done little to replace income lost from empty movie theaters, dry-docked cruise ships, and socially-distanced theme parks.

Sky’s the limit for U.S. equities, at least until the Biden administration hits a brick wall with their massive stimulus bull. At least to the point, left-leaning politicians have avoided most of the logistical mistakes made by the Obama administration in 2009.  The Republican Party is trying to rebrand itself after the departure of Donald Trump and their infighting has allowed the Democratic-controlled Congress to move aggressively on economic policy.

For a look at all of today’s economic events, check out our economic calendar.

Cisco to Acquire Cloud Communications Software Firm IMImobile in Nearly $730Mln Deal

Cisco, the world’s leading provider of IP-based networking solutions, announced on Monday to acquire a London-based cloud communications software company IMImobile for 595 pence per share or an aggregate purchase price of nearly $730 million.

Together with IMImobile, Cisco will be able to provide an end-to-end customer interaction management solution, and the ability to drive faster and smarter interactions and orchestration through the customer’s channel of choice, the company said in the statement.

Cisco’s shares closed 0.61% higher at $44.38 on Friday. However, the stock is down around 7% so far this year.

Cisco Stock Price Forecast

Sixteen equity analysts forecast the average price in 12 months at $47.69 with a high forecast of $60.00 and a low forecast of $41.00. The average price target represents a 7.46% increase from the last price of $44.38. From those 16 analysts, eight rated “Buy”, eight rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $54 with a high of $65 under a bull-case scenario and $33 under the worst-case scenario. The firm currently has an “Overweight” rating on the technology conglomerate’s stock.

Several other analysts have also upgraded their stock outlook. Cisco Systems had its target price increased by Piper Sandler to $45 from $44. JP Morgan lowered their target price to $46 from $50 and set a neutral rating on the stock. BidaskClub reduced to a strong sell rating from a sell. New Street Research raised to a buy rating from a neutral and set a $60 target price.

Analyst Comments

“Infrastructure revenue likely to decline with a more limited IT budget environment, but pockets of growth can help stabilize earnings. The higher proportion of recurring sales limits downside volatility relative to previous cycles, but still not immune,” said Meta Marshall, equity analyst at Morgan Stanley.

“Security/analytics capabilities should help Cisco stay important to IT budgets even as cloud transition accelerates. Security and applications growth (primarily inorganic) help improve margins of the overall business,” Marshall added.

Upside and Downside Risks

Risks to Upside: 1) Software and services business drive growth. 2) Accelerated replacement cycles from product refreshes support growth in spite of weaker macro conditions. 3) A re-acceleration in GDP and therefore IT spending – highlighted by Morgan Stanley.

Risks to Downside: 1) Federal spending disruption. 2) Prolonged macro downturn and subsequent lack of recovery in networking spend. 3) Security sales materially decelerate given the disruption in leadership.

Cisco Shares Jump Over 8% After Earnings Beat; Target Price $55 in Best Case

Cisco reported better-than-expected revenue and profit in the first quarter of fiscal 2021 as demand for its network services, teleconferencing tools and cybersecurity software surged amid COVID-19 pandemic, sending its shares up over 8% in after-hours trading on Thursday.

The network equipment provider said its revenue plunged 9% to $11.93 billion in the first quarter of fiscal 2021, which ended on Oct. 24, beating the market expectations of $11.85 billion.

Cisco reported net income on a generally accepted accounting principles (GAAP) basis of $2.2 billion or $0.51 per share, and non-GAAP net income of $3.2 billion or $0.76 per share. That was higher than Wall Street’s consensus of 70 cents per share.

“Although Cisco is benefiting in certain areas, like an increased need for remote collaboration and cloud security, its core products have been hampered by soft networking infrastructure upgrade demand amid widespread sheltering-in-place,” said Mark Cash, equity analyst at Morningstar.

“Nonetheless, we believe that Cisco is turning the corner after a few quarters of declining sales due to the pandemic and we expect to see improved performance in the second quarter. With Cisco more positive about the demand environment ahead, shares increased over 7% after reporting. We are maintaining our $48 fair value estimate and believe shares are undervalued,” Cash added.

Cisco forecasts GAAP EPS to be between $0.55 to $0.60 in the second quarter of fiscal 2021.

Post this announcement, Cisco shares climbed over 8% to $41.63 in extended trading on Thursday. However, the stock is down about 20% so far this year.

Executives’ comments

“Cisco is off to a solid start in fiscal 2021 and we are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties,” said Chuck Robbins, chairman and CEO of Cisco.

“Our focus is on winning with a differentiated innovative portfolio, long-term growth and being a trusted technology partner offering choice and flexibility to our customers.  We see many great opportunities ahead as every company in every industry is accelerating its digital-first strategy,” Robbins added.

“Our Q1 results reflect good execution with strong margins in a challenging environment,” said CFO of Cisco, Kelly Kramer, who will be succeeded by Scott Herren from December 18.

“We continued to transform our business through more software offerings and subscriptions, driving 10% year over year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3 billion to shareholders,” Kramer added.

Cisco Stock Price Forecast

Twenty equity analysts forecast the average price in 12 months at $47.33 with a high forecast of $55.00 and a low forecast of $36.00. The average price target represents a 22.39% increase from the last price of $38.67. From those 20 analysts, eleven rated “Buy”, nine rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $54 with a high of $65 under a bull-case scenario and $33 under the worst-case scenario. The firm currently has an “Overweight” rating on the multinational technology conglomerate’s stock. Cisco Systems had its price target raised by research analysts at Credit Suisse Group to $45 from $36. The brokerage currently has a “neutral” rating on the network equipment provider’s stock.

Several other analysts have also recently commented on the stock. Bank of America cut their price objective on shares of Cisco Systems to $50 from $52 and set a “buy” rating. ValuEngine downgraded shares to a “sell” rating from a “hold”. Royal Bank of Canada reiterated a “buy” rating and set a $48 price target. Goldman Sachs Group reiterated a “neutral” rating and issued a $45 price target.

Analyst Comments

“Infrastructure revenue likely to decline with a more limited IT budget environment, but pockets of growth can help stabilize earnings. The higher proportion of recurring sales limits downside volatility relative to previous cycles, but still not immune,” said Meta Marshall, equity analyst at Morgan Stanley.

“Security/analytics capabilities should help Cisco stay important to IT budgets even as cloud transition accelerates. Security and applications growth (primarily inorganic) help improve margins of the overall business.”

Upside and Downside Risks

Risks to Upside: 1) Software and services business drive growth. 2) Accelerated replacement cycles from product refreshes support growth in spite of weaker macro conditions. 3) A re-acceleration in GDP and therefore IT spending – highlighted by Morgan Stanley.

Risks to Downside: 1) Federal spending disruption. 2) Prolonged macro downturn and subsequent lack of recovery in networking spend. 3) Security sales materially decelerate given the disruption in leadership.

Check out FX Empire’s earnings calendar

Legacy Businesses Weigh On Cisco Systems Outlook

Dow component Cisco Systems Inc. (CSCO) reports fiscal Q1 2021 earnings on Nov. 12, with Wall Street analysts looking for a profit of $0.70 per-share on $11.85 billion in revenue. If met, the earnings-per-share (EPS) would mark a 17% profit decline compared to the same quarter in 2019. The stock sold off more than 5% after warning about the current quarter’s earnings and revenue in August and has relinquished another 16% since that time.

Hardware Revenue In Multiyear Decline

Revenue from legacy routing and switching businesses has been declining for many quarters, forcing the company to reinvent itself through software and services. This approach has worked well for other old school tech giants but income from the new divisions has, so far at least, failed to replace lost hardware revenue. Additional investment, acquisitions, and restructuring may be needed to cover the shortfall and get Cisco back into mid-to-high single digit growth.

Citigroup recently downgraded Cisco to ‘Neutral’, with analyst Jim Suva warning that “Cisco’s switching and routing sales, or about 40% of total sales, remain on the decline and we are less confident in the company’s ability to return to growth or gain market share, particularly in declining markets. As a result, we do not expect Cisco’s hardware segment (Infrastructure Platforms) to return to growth near term.

Wall Street And Technical Outlook

Wall Street consensus is split right down the middle, with a ‘Moderate Buy’ rating based upon 10 ‘Buy’ and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $36 to a Street-high $55 while the stock is set to open Tuesday’s U.S. session right at the low target. There’s plenty of room for upside in this humble configuration but the company isn’t likely to exceed modest expectations later this week.

Cisco topped out about 24 points below 2000’s all-time high at 82.00 in April 2019 and broke down in August, entering a decline that immediately sliced through support at the 200-day moving average. The stock fell to a two-year low during the first quarter’s pandemic decline and failed a second attempt to remount moving average support in August. It’s now trading just four points above the March low, raising odds it will test and possibly break that level in coming months.

For a look at all of today’s economic events, check out our economic calendar.

Stock Pick Update: September 2 – September 8, 2020

The broad stock market has extended its medium-term uptrend in the last five trading days (August 26 – September 1). The S&P 500 index has set new record high of 3,528.03 on Tuesday, as it further extended its rally after breaking above February 19 high of 3,393.52. Five months ago on March 23, the market sold off to new medium-term low of 2,191.86. It was a stunning 35.4% below February 19 record high of 3,393.52. The corona virus and economic slowdown fears erased more than a third of the broad stock market value. But since then stocks rallied 61.0%.

The S&P 500 index has gained 2.22% between August 26 and September 1. In the same period of time our five long and five short stock picks have gained 1.03%. So stock picks were relatively weaker than the broad stock market. Our long stock picks have gained 2.02% and short stock picks have resulted in a small gain of 0.04%.

There are risks that couldn’t be avoided in trading. Hence the need for proper money management and a relatively diversified stock portfolio. This is especially important if trading on a time basis – without using stop-loss/ profit target levels. We are just buying or selling stocks at open on Wednesday and selling or buying them back at close on the next Tuesday.

If stocks were in a prolonged downtrend, being able to profit anyway, would be extremely valuable. Of course, it’s not the point of our Stock Pick Updates to forecast where the general stock market is likely to move, but rather to provide you with stocks that are likely to generate profits regardless of what the S&P does.

This means that our overall stock-picking performance can be summarized on the chart below. The assumptions are: starting with $100k, no leverage used. The data before Dec 24, 2019 comes from our internal tests and data after that can be verified by individual Stock Pick Updates posted on our website.

Below we include statistics and the details of our three recent updates:

  • September 1, 2020
    Long Picks (August 26 open – September 1 close % change): FIS (+4.53%), MAR (+4.82%), DISH (+1.59%), PXD (-2.85%), WEC (+2.02%)
    Short Picks (August 26 open – September 1 close % change): PSX (-4.28%), D (-0.35%), ANTM (-1.31%), AAPL (+6.34%), HD (-0.62%)Average long result: +2.02%, average short result: +0.04%
    Total profit (average): +1.03%
  • August 25, 2020
    Long Picks (August 19 open – August 25 close % change): VFC (+3.87%), IBM (-0.15%), CAT (+1.91%), CVX (-1.34%), SCHW (+1.72%)
    Short Picks (August 19 open – August 25 close % change): WMB (-2.11%), TROW (-1.15%), XEL (-1.84%), HD (-0.46%), AAPL (+7.62%)Average long result: +1.20%, average short result: -0.41%
    Total profit (average): +0.40%
  • August 18, 2020
    Long Picks (August 12 open – August 18 close % change): BA (-7.49%), SCHW (-1.55%), CXO (-4.91%), BXP (-5.58%), MSI (+5.14%)
    Short Picks (August 12 open – August 18 close % change): CCI (+1.85%), AAPL (+4.58%), CHTR (+3.33%), ROP (+0.48%), SPGI (+3.65%)Average long result: -2.88%, average short result: -2.78%
    Total profit (average): -2.83%

Let’s check which stocks could magnify S&P’s gains in case it rallies, and which stocks would be likely to decline the most if S&P plunges. Here are our stock picks for the Wednesday, September 2 – Tuesday, September 8 period.

We will assume the following: the stocks will be bought or sold short on the opening of today’s trading session (September 2) and sold or bought back on the closing of the next Tuesday’s trading session (September 8).

We will provide stock trading ideas based on our in-depth technical and fundamental analysis, but since the main point of this publication is to provide the top 5 long and top 5 short candidates (our opinion, not an investment advice) for this week, we will focus solely on the technicals. The latter are simply more useful in case of short-term trades.

First, we will take a look at the recent performance by sector. It may show us which sector is likely to perform best in the near future and which sector is likely to lag. Then, we will select our buy and sell stock picks.

There are eleven stock market sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology, Communications Services, Utilities and Real Estate. They are further divided into industries, but we will just stick with these main sectors of the stock market.

We will analyze them and their relative performance by looking at the Select Sector SPDR ETF’s.

Based on the above, we decided to choose our stock picks for the next week. We will choose our top 3 long and top 3 short candidates using trend-following approach, and top 2 long and top 2 short candidates using contrarian approach:

Trend-following approach:

  • buys: 1 x Technology, 1 x Communication Services, 1 x Consumer Discretionary
  • sells: 1 x Utilities, 1 x Energy, 1 x Real Estate

Contrarian approach (betting against the recent trend):

  • buys: 1 x Utilities, 1 x Energy
  • sells: 1 x Technology, 1 x Communication Services

Trend-following approach

Top 3 Buy Candidates

CSCO Cisco Systems, Inc. – Technology

  • Possible short-term bottoming pattern along $42
  • The resistance level of $45
  • The support level is at $40

DIS Walt Disney Co. – Communication Services

  • Stock remains above month-long upward trend line
  • Possible uptrend continuation
  • The resistance level of $135.0
  • The support level is at $127.5

MAR Marriott Intl Inc New – Consumer Discretionary

  • Stock fluctuates after breaking above short-term downward trend line
  • The resistance level and an upside profit target level is at $115, marked by previous high

Summing up, the above trend-following long stock picks are just a part of our whole Stock Pick Update. The Technology, Communication Services and Consumer Discretionary sectors were relatively the strongest in the last 30 days. So that part of our ten long and short stock picks is meant to outperform in the coming days if the broad stock market acts similarly as it did before.

We hope you enjoyed reading the above free analysis, and we encourage you to read today’s Stock Pick Update – this analysis’ full version. There, we include the stock market sector analysis for the past month and remaining long and short stock picks for the next week. There’s no risk in subscribing right away, because there’s a 30-day money back guarantee for all our products, so we encourage you to subscribe today.

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Paul Rejczak
Stock Trading Strategist
Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Disappointing Forecast from Cisco Systems Drags Dow Lower

The major U.S. stock indexes finished mixed on Thursday with the NASDAQ Composite posting the lone gain. The S&P 500 Index briefly traded above its record closing high level for a second session earlier in the session, but sellers regained control into the close. The Dow traded higher early but eventually fell in the wake of a disappointing forecast from Cisco Systems, Inc. A sharp rise in Apple, Inc. provided the primary support for the NASDAQ.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 3373.43, down $6.92 or -0.23%. The blue chip Dow Jones industrial Average finished at 27896.72, down 80.12 or -0.32% and the technology-driven NASDAQ Composite closed at 11042.50, up 30.26 or +0.32%.

Cisco’s First-Quarter Forecast Disappoints Shares Fall

Cisco Systems, Inc. on Wednesday forecast first-quarter revenue and profit below Wall Street estimates and laid out a restructuring plan, as the coronavirus crisis forced its clients to hold back spending, Reuters reported. Shares of the top network equipment maker fell nearly 5% ahead of the opening on Thursday.

Cisco Lays Out Restructuring Plan

The restructuring, which includes a voluntary early retirement program and layoffs, will begin this quarter, the company said, adding that it expected to recognize a related one-time charge of about $900 million.

On a conference call with investors, Chief Executive Chuck Robbins said Cisco also plans to reduce its expenses by $1 billion on an annualized basis “over the next few quarters.”

Cisco Revenue Expected to Drop

Cisco expects current-quarter revenue to drop between 9% and 11% from last year, implying a range of between $11.71 billion and $11.97 billion, while analysts had expected $12.25 billion.

It also forecast adjusted earnings of 69 cents to 71 cents per share, below estimates of 76 cents, according to Refinitiv IBES data.

For the fiscal fourth quarter ended July 25, revenue fell about 9% to $12.15 billion (9.31 billion pounds), but beat estimates of $12.08 billion, as more people working from home boosted demand for its web security and teleconferencing tools.

Excluding items, Cisco earned 80 cents per share in the quarter, beating estimates of 74 cents.

Cisco CFO to Retire

The company also announced that Chief Financial Officer Kelly Kramer will retire from Cisco, but will remain with the company until a successor is found.

Kramer told Reuters that Cisco will continue to acquire smaller companies to help boost revenue and that its $2.84 billion acquisition of Aracia Communications Inc. remains on track. The deal was slated to close before the end of Cisco’s fiscal 2020 last month, but the company said it is still awaiting approval from Chinese regulators.

“We still feel good ab out it. We’re responding to their requests as fast as we can to make sure there are no issues,” Kramer said. “We are focused on getting it done.”

For a look at all of today’s economic events, check out our economic calendar.

Cisco Tumbles After Soft Q1 Earnings Guidance

Cisco Systems, Inc. (CSCO) plunged 6.44% in after-hours trade Wednesday on the back of declining fiscal Q4 revenues and downbeat guidance for the current quarter. The company, which manufactures networking hardware and security software, reported quarterly sales of $12.15 billion, down from year-ago revenues of $13.43 billion.

Meanwhile, adjusted earnings for the period came in at 80 cents per share compared to 83 a share in the quarter ended July 2019. However, the San Jose-based company’s top- and bottom-line figures surpassed Wall Street expectations by 0.50% and 8%, respectively.

Through Wednesday’s close, Cisco stock has a market capitalization of $203 billion, yields an enticing 3.05%, and trades just 2.52% higher on the year. Performance has improved over the past three months, with the shares gaining around 12%.

Soft Forward Guidance

Management forecast Q1 adjusted earnings guidance of 69 cents to 71 cents and a revenue decline of 7% to 9%.  Analysts had projected earnings of 76 cents and $12.25 billion in sales for the quarter, representing about a 7% decline.

Software Focus

The company said it plans to acquire network intelligence company ThousandEyes in the quarter for $1 billion to provide a range of remote work and learning solutions. In recent years, Cisco has made a strategic shift to generate more revenue from software and service solutions to compete with cloud offerings from tech heavyweights Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT), and Alphabet Inc. (GOOGL).

“By the end of fiscal 2020, we achieved our goal of more than half of our revenue coming from software and services, and this strategy continues to resonate with customers as they digitize their organizations,” Cisco Chief Executive Chuck Robbins said in a statement accompanying the quarterly results, per MarketWatch.

Wall Street Outlook

Despite the stock’s lackluster performance relative to the technology sector, analysts remain modestly bullish. The stock receives 13 ‘Buy’ ratings, 1 ‘Overweight’ rating, and 13 ‘Hold’ ratings. Price targets range from as high as $60 to as low as $41, with a consensus of $50.05. This represents a 4% premium to Wednesday’s $48.10 close.

Technical Outlook and Trading Tactics

Since testing the low 30s in mid-March, Cisco shares have made a Nike swoosh-like recovery. Over the past two months, the price looks to be carving out the right shoulder of an inverse head and shoulders pattern – a formation that typically signals a market bottom. Furthermore, the 50-day simple moving average (SMA) crossed above the 200-day SMA last month to indicate a new uptrend. Traders should use any weakness as a buying opportunity, providing the stock remains above the June 11 low at $43.64. Look for a move up to the $57.50 level, where price funds overhead resistance from a horizontal trendline.