(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Cisco Systems Inc.'s (CSCO) stock may fall after a hot run-up has resulted in shares rising by approximately 15% in 2018. But the run-up has also lead to the stock becoming overvalued on a historical basis. Meanwhile, shares have stalled out at a technical resistance level around $45. It suggests that Cisco stock may be poised to fall over the short- to medium-term by as much as 13%. (For more, see also: Cisco Is Overvalued, Don't Believe the Bulls.)
Shares of Cisco have jumped in 2018, after posting strong results on February 14, and beating analysts earnings estimates by 6.51%. This sharp move higher has led the stock to a historical high earnings multiple at roughly 15.7 times fiscal 2019 earnings of $2.87.
Can't Rise Through Resistance
Shares of Cisco have stalled out since February 28, around a technical resistance area at $46. The stock reached that resistance level on two occasions and failed each time. The stock also has a gap to refill which was created on February 15, the day after earnings at $42.15, a decline of about 4.5%. But should shares fall below $42.15, a further drop to nearly $38.40, a fall of 12.9% could be in order.
More Bearish Indicators
The chart also shows a relative strength index (RSI) that has been trending lower since January 26, despite a stock that has been rising steadily, a bearish indicator. Additionally, the stock was rising on increasing levels of volume in the post-earnings run-up, but that volume has started to decline steadily. It could be a sign that buyers have begun becoming fewer in numbers, another bearish indication.
Cisco shares just aren't that cheap anymore, trading at nearly 15.7 times 2019 earnings of $2.87, representing earnings growth of only 10.9%. When adjusted for growth, the PEG ratio jumps to a level of about 1.4, which makes Cisco expensive versus its growth rate. Revenue is expected to grow by only 2.8% in 2019 to $50.509 billion, which puts pressure on the company to operate efficiently in order to generate the earnings growth.
But analysts are bullish on the shares, with the average price target for the stock at $48.48, a rise of nearly 10% from the stock's current price. In fact, of the 30 analysts that cover the stock, nearly 67% have a "buy" or "outperform" rating on the shares.
If Cisco does suffer a pullback it may the be case that it is only for the short term. Should the stock deliver better than expected results for next quarter, it could lead to revised earnings estimates and help bring down the earnings multiple.
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.