Cards Stacked Against Cisco Ahead of Earnings

Sometimes it’s hard to go against a well-established company. After all, stocks generally rise over time, and there’s a tendency to believe in known names. But you have to look past the reputation and examine the numbers. Such is the case with Cisco Systems, Inc . (NASDAQ: CSCO ).  The company reports earnings after the close next Wednesday, Nov. 10. The thing about Cisco is it doesn’t miss earnings estimates. Period. Our data goes back to January 2005, and there isn’t a miss to be found. The problem, of course, is that the market is pretty well trained to expect a “surprise” of a few pennies every quarter. So beating is no big deal; it’s a given. What concerns us is that the whisper number is much higher than the analyst estimate – 45 cents compared to 34 cents. That’s a huge difference. In fact, the biggest difference we’ve seen in the past two years is just five cents, so this is a red flag. Beyond the numbers, CSCO simply doesn’t perform well after earnings. Looking back, the stock has dropped within the two weeks after six of the past eight reports. The average move two weeks after these eight reports is a decline of about 5%. Keep in mind that these drops followed earnings beats. On the charts, the stock is finding staunch resistance at the 200-day moving average after a 20% rally off the late August low. On the other hand, the 20-day is providing support. Peak November call open interest lies at the $24 strike (2% above the current share price), while peak put open interest rests at the $22 strike (6.4% below the current price).   So we’re seeing more downside potential.   Sentiment toward CSCO is largely positive. Short interest is negligible, the put/call ratio is near the middle of its yearly range, and 26 of 35 covering analysts rate the stock a “buy” (with just one brave sole giving it a “sell”). This optimism creates some vulnerability for the stock should earnings not impress. Adding it all up, it appears the cards are stacked against CSCO this quarter. Cisco will no doubt beat the earnings estimate, but unfortunately for smooth-talking CEO John Chambers and company, that may not be good enough this time around.  Buy the CSCO Dec 24 Puts to allow the expected post-earnings decline to play out.
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