Cisco Options Traders Bet Stock Will Rebound 7% Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Cisco Systems, Inc. (CSCO) stock is having a solid 2018 with the shares climbing by 18%. But recently it has fallen victim to a broader stock market sell-off, dropping by as much as 10% from those highs. Now some options traders are betting the stock rebounds by 7% by the beginning of next year.

One reason for the bullish view is that analysts are looking for strong earnings growth for the fiscal first quarter and the full year. Even better they have been raising their earnings estimates and price targets since August. 

CSCO data by YCharts

Bullish Bets

Open interest levels for the $47 call options expiring on January 18 have more than doubled in recent weeks to 27,000 contracts. A buyer of those calls needs the stock to rise to $48.60 to earn a profit. 

A 13% Rise

Analysts are looking for the stock to climb to even higher, by 13% to $51.25. In fact, of the 29 analysts that cover the stock 69% rate the stock a buy or outperform with 31% rating it a hold. 

CSCO Price Target data by YCharts

Better Growth

The analysts are looking for the company to report strong fiscal first quarter results in the middle of November. Earnings are expected to grow by 18% on revenue growth of 6%. (For more, see also: Cisco's Stock May Reach Highest Price in 18 Years.)

Earnings for the full-year 2019 are forecast to be strong and to increase by 15% to $3.00 per share, on revenue growth of 4% to $51.5 billion. Analysts are forecasting earnings growth to slow in 2020 to 9%, with revenue growth slowing to 3%. But revenue and earnings estimates for both 2019 and 2020 have been rising since August.

CSCO EPS Estimates for Current Fiscal Year data by YCharts

The stock trades at a 2019 PE ratio of 15 which gives the stock a growth adjusted PEG ratio 1, making it attractive at current levels. Should the company deliver strong results in a few weeks time and give analysts an excuse to boost earnings estimates even higher, then the stock will have an excellent reason to continue to move up. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.