EOT Trade Alert – May 11, 2012

Corey Williams | May 11, 2012

May 11, 2012

Trade Alert:

Buy CSCO August 2012 $16 Calls at $1.45 or better

Company Background:

Cisco Systems (CSCO) is the world’s leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among computer networks. In addition, Cisco has recently entered newer markets, such as video conferencing, web-based collaboration, and data center servers.

Short-Term Catalyst:

Shares of CSCO have recently fallen over 9% on the heels of its earnings announcement and comments by Cisco’s CEO John Chambers.

I remember the days when Wall Street would watch Cisco Systems’ earnings like a hawk.

What the company said moved tech stocks. If CEO John Chambers talked about bullish tech-spending trends, hello big tech rally. But if he spoke about weak spending, investors would take that as a cue to sell tech stocks.

That was when Cisco was a market leader still in the early stages of growth.

Now it’s dealing with competition left and right and massive restructuring. It’s a mature company and nowhere close to as relevant as it once was.

Cisco just reported a Q3 profit of $0.48 a share. A penny above the consensus estimate and a 14% increase from the year-ago quarter.

But sales growth decelerated from the prior quarter rising only 7% against analysts’ expectations of 7.5%.

These results were respectable, but the outlook caused investors to sell Cisco early the following day.

And John Chambers did not help. He told shareholders that Cisco’s guidance for the next quarter was going to remain weak on European concerns and a slowdown in India.

However, I think there’s still hope for this mature and still powerful company.

For example…

Other components of Cisco’s business turned in reasonable performances. Sales at its service provider video unit rose 11% from a year ago to $1 billion.

Wireless sales increased 20% to $425 million. And lastly, security sales gained 9% to $345 million.

Bottom line…

I believe that Cisco still has its share of supporters and will remain a mainstay in several value and growth portfolios. It could even catch a valuation upgrade or two in the coming weeks. After all, it’s a cheap stock selling at 10x forward earnings.

So, now’s the time to go hunting for some inexpensive call options and watch them climb in value.

Trade Details:

Underlying Stock Symbol:	CSCO
Current Bid-Ask Price:	$1.40 – $1.45
Option “Buy Up To” Price:	$1.45
Break-Even On Stock At Expiration:	$17.45
Maximum Risk Per Contract:	$145

Exit Strategy:

CSCO is trading at $16.79 per share. This option is just out of the money. The reason for using this strike is due to the slow and steady upward movement CSCO has shown over the years. The way this option will move is closely correlated with the stock in a positive fashion.

Resistance will be at $19 and again at $20. Don’t forget, we want this stock to move higher. Support levels will be at $15.50 and $14.75. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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