Cisco Systems: Buy The Dips Or Sell The Rips?

Cisco Systems, Inc. CSCO shares have been bludgeoned by the broader market selloff. Is the stock just a victim of the markets or is it actually one of the culprits that tells of where the market may be headed?

The stock has been a laggard versus the NASDAQ 100 for quite some time -- at least since its 2010 peak. The stock rallied nicely from mid-2011 until mid-2013. However, since the 2013 high just above $26, no new highs have been set in Cisco shares even as the NASDAQ was doing so seemingly without pause during that same time frame. So, the fact that Cisco is leading the way lower in the current selloff should come as no surprise.

Are the fundamentals of the stock deteriorating as badly as the stock suggests?

At first glance, here's what stands out:

• The company has huge positive cash flows of over $8.91 billion annually, which is generated by more than $47 billion in annual revenues and nearly 17 percent net profit margins.
• The company's balance sheet is nearly perfect as it holds more than $47 billion in cash reserves and only sports a debt-to-equity ratio of 36.91 percent.
• The price-to-book and price-to-sales of 2.08 and 2.49 are very reasonable from a valuation perspective.
• The problem comes in the lack of growth and the struggle to find an appropriate price-to-earnings given that lack of growth: Revenue growth for 2015 is expected to be only 4.4 percent, EPS growth for 2015 is expected to be 5.5 percent and the P/E ratio comes in at around 10, which given any better growth might be viewed as "cheap."
• The other problem comes in identifying where the next major growth initiative will come from for Cisco.

Technical Take

Technicians note that Cisco is deeply oversold on a daily basis, as is the broader market. However, real technical damage has been done during this selloff, opening up the likelihood of even more downside to come in the intermediate to longer-term. Technicians note that the stock may be in the "C" wave of a long-term "ABC" downside correction with an eventual target of $19-$20, depending on how the "ABC" pivots are drawn out on the chart.

The lower end of that range would correspond nicely with the stock's long-term uptrend line. From its Wednesay close of $22.96, $19-$20 does not seem that far away. The bulls will certainly be looking to hold their ground down at those levels, but unfortunately not with any conviction prior to that.