(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Cisco Systems, Inc. (CSCO) stock has been steadily climbing over the past year, with shares of the networking company reaching prices not seen in nearly 20 years, rising by almost 36%, and easily beating the S&P 500’s return of 13%. Leading the advance has been better than expected earnings and revenue growth. But momentum started turning in May after the company's quarterly results provided forward-looking guidance that fell short of expectations.
The stock had fallen by about 7% since the middle of May when shares peaked around $46. The technical charts suggest shares could drop even further, perhaps by as much as another 10%, pushing shares to roughly $39 from its current price of approximately $43.20. This hands the shares a total decline of more than 15% from its peak earlier this year.
Cisco fell below a key technical uptrend on June 20—a bearish indicator. The stock has been trading firmly above the uptrend since first breaking out in November of 2017. Another bearish indication is that the stock failed at a technical resistance level at $45 when it finished refilling the technical gap created after the company's weak quarterly results in May. Typically, when a stock refills a gap it continues with the previous trend, which in this case is lower. The next level of technical support comes around $38.90, and that is where shares of Cisco may fall, too.
Another bearish indicator is its relative strength index (RSI) which has been trending lower since peaking at overbought levels around 78. With the stock rising while the RSI was falling, it created a bearish divergence, also suggesting the stock price was peaking as bullish momentum was moving out of Cisco.
Options traders have been increasing their bets that the stock is due to fall. Recently the put options for expiration on August 17 at the $40 and $41 strike prices have seen increasing levels of open interest. It would suggest some traders are growing more bearish on the stock. (For more, see also: Why Cisco's Hot Stock May Cool Off Fast.)
Cisco is currently trading at the upper end of its historical valuation at nearly 15 times fiscal 2019 earnings estimates of $2.91 per share. Before the end of 2017, shares of Cisco had not traded at more than 14 times its one-year forward earnings multiple.
Fundamental Chart data by YCharts
Perhaps the quarterly results later this summer will reaffirm the bull case, reversing the current downtrend. But until that happens, shares appear poised to drift lower.
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.