Trade Alert: A New Opportunity in Cisco

I have a new trade to start the week — an opportunity in an undervalued company that’s showing signs of taking off: Cisco Systems Inc. (Nasdaq: CSCO).

Cisco is at the beginning of an incredibly strong seasonal uptrend. I want you to understand why I believe that, so today I plan to lay out all the data I look at when considering your trades — the charts, my math and my analysis.

That way, you can make our trades confidently.

Of course, there’s never a guarantee that a stock will follow an expected pattern. I wish the stock market worked that way. So when I look at the data, I’m not looking for guarantees. Instead, I look for the numbers to provide a persuasive argument for a coming seasonal trend — and Cisco has provided that and more.

So let’s take a look at our first chart, which represents Cisco’s average seasonality over a given year:

Cisco’s Historical Stock Movement

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In the chart, the blue diamond shows the current date. Based on the historical data, we can expect Cisco to move higher into the summer months. In fact, since Cisco began trading in 1990, buying at this time of year has resulted in a winning trade 83.3% of the time. That’s 20 out of 24 years. (The first and last year don’t count for the testing period.)

On average, the stock has gained 7.9% in eight weeks, which could’ve been magnified nicely with call options.

Now that we’ve considered history — let’s turn to the future. The next chart shows a price projection based on more recent data.

Cisco’s Coming Uptrend

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The dashed vertical line marks today. The black line at the top is the recent price action. And the green line forecasts the short-term trend in the stock. As you can see, that spikes right after today — so we have a great buying opportunity now.

Moreover, there’s a momentum indicator at the bottom of the chart that reinforces our buying opportunity. See, the blue line forecasts the strength of the stock’s momentum in the short term — and you can see that pick up after today’s date as well.

The next chart shows the weekly view. It’s possible that a stock can show different trends in different time frames. In this case, both daily and weekly views line up perfectly, which is relatively rare. This confirms that now is an ideal time to buy and shows the trend is strong for the rest of the year. It also shows that momentum is likely to slow in June, so the best holding period would be a call option expiring in June.

Cisco’s Coming Uptrend
(Weekly Pricing)

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These three charts explain why Cisco is a buy — but now let’s look at the company’s data to see if it supports the company’s seasonal uptrend this time around…

Cisco Is Undervalued

The next question to address is what factors could drive the expected trend. Well, one of the potential factors is the fact that the stock is undervalued.

Cisco was one of the great growth stocks in the 1990s. The company makes networking equipment, so in the 1990s (as the Internet was being built), Cisco’s routers were in high demand. Since these boxes were such key components of the Internet, the stock gained more than 1,700% before the dot-com bubble popped in early 2000.

Since then, Cisco has transitioned to a mature, slow-growth company. And it’s now a value stock, which supports a coming uptrend.

To top it off, Cisco is also an income stock for tech investors with a dividend yield of more than 3.5%.

And that yield allows us to find a price target for the stock … Over the past three years, Cisco has provided an average yield of 3.0%. In the long run, a stock’s fundamentals tend to be mean-reverting — so we should expect the yield to move back toward its average.

In order to yield 3% with the current annual payout of $1.16, the stock would need to trade at about $38.60. This is more than 16% above the $33.18 current price.

Let me go through that calculation in a little more detail so you can see how I got there.

Stocks tend to move from undervalued to overvalued. This means the dividend yield changes from above average to below average. To be conservative, I used the average yield to find a price target. When the yield is 3.5%, as it is now, we would expect it to decline toward its average 3%.

To find a price target, we divide the payout by the yield, or $1.16 divided by 0.03 (which is 3% as a decimal) in this case. This results in a $38.66 price target.

So, since Cisco appears to be significantly undervalued, it’s actually a potential long-term investment (which is also supported by the above charts). However, our interest is in the stock as a short-term trading opportunity because we can make quick, significant gains with June calls before the stock’s momentum slows a bit in June.

Your Trade Details

Now for the specifics on our trade.

For Cisco, the $33 call options expiring in June have a large potential reward for a relatively small amount of risk.

Buy Action to Take
Sell Action to Take
Stock: Cisco Systems Inc. (CSCO)
Option Type: Call Option
Expiration: June 16, 2017
Strike Price: $33
Option Symbol: CSCO170616C00033000
Action: Buy to Open
Order Type: Limit Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: $1.15
Trade Deadline: If your order is not filled by my  next alert, I’ll update you on the trade.
Note: Do not place a market order. Set the limit order at $1.15 or less. If you aren’t sure how to do that, just watch my options tutorial here.
Once this order is filled, place the following order:
Sell Action to Take
Stock: Cisco Systems Inc. (CSCO)
Option Type: Call Option
Expiration: June 16, 2017
Strike Price: $33
Option Symbol: CSCO170616C00033000
Action: Sell to Close Half
Order Type: Limit Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: Whatever nets you a 100% gain.
Trade Deadline: Keep this order open until it is filled or canceled.
Note: This second order will allow us to collect a 100% gain on half of our position in the event that a quick move happens before I can get a trade alert out to you.

I’ll have an update on the positons in the portfolio later in the week.

If you have any questions before then, please send me an email. I’ll do my best to answer those questions in future issues. You can reach me at precisionprofits@banyanhill.com.

Regards,

Michael Carr, CMT
Editor, Precision Profits