Cisco Systems Inc. option traders are placing the most bullish bets in almost a year, after the largest provider of networking equipment plunged this month for the fourth consecutive time following an earnings report.
The ratio of outstanding puts to sell Cisco stock versus calls to buy dropped to 0.64-to-1 on Feb. 18, the lowest level since March 2010, data compiled by Bloomberg show. Cisco’s put-to-call ratio has declined 9.9 percent in the eight days following its profit report, the second-fastest decline following an earnings release since 2005, according to the data. During that time, the put-to-call ratio for the Technology Select Sector SPDR Fund, an exchange-traded fund that tracks technology companies, gained 1.1 percent.
“The ratio becoming better for the company indicates that investors think that the company has already seen the worst,” said Sandeep Shyamsukha, an analyst at Auriga USA LLC in San Francisco who’s had a “buy” rating on Cisco since January and lowered his price estimate for the company to $23 on Feb. 17. “This is a good entry point. There’s probably potential for more upside.”
Cisco dropped 25 percent in the past year through yesterday, compared with a 20 percent gain for the information technology companies from the Standard & Poor’s 500 Index. San Jose, California-based Cisco plunged 14 percent on Feb. 10 after its second-quarter report showed higher spending on new products eroded its profitability. Cisco’s put-to-call ratio in the eight days following the past four earnings releases dropped a median of 8.7 percent, according to data compiled by Bloomberg.
“The shares sold off fairly hard on each of the last three quarterly conference calls, as longer term concerns have grown regarding deteriorating margins and market share,” said David Dillon, a fund manager at HighMark Capital Management, which oversees more than $16 billion. “With the shares at current levels, the risk-reward balance now appears more favorable.”
Cisco shares slid 0.2 percent to $18.36 today.
The options that had the biggest increase in open interest since Feb. 9 were the May $20 calls, which increased by 161,380 contracts to 165,434 yesterday, data compiled by Bloomberg show. They accounted for 4.3 percent of total options open interest, or existing contracts, for Cisco yesterday. Eight of the 10 contracts with the highest increases in open interest since Feb. 9 were calls.
The networking equipment provider trades for 13.8 times earnings from the past year, compared with 15.5 times earnings for the S&P 500. Cisco’s price-to-earnings ratio on Feb. 18 was the lowest relative to the S&P 500 since January 2009, Bloomberg data show.
Cisco on Feb. 22 named Gary Moore chief operating officer, a new position. Moore, 61, will oversee the engineering, marketing, operations and services organizations, according to a company statement. Cisco’s gross margin, the percentage of profit left after subtracting production costs, slid to 62.4 percent in the period that ended Jan. 29, the company said Feb. 9. That fell short of 63.3 percent, the average estimate of analysts surveyed by Bloomberg.
“Challenges are there, but the company is already working to resolve the issues,” Shyamsukha said. “Things will start turning around toward the end of this year.”
Goldman Sachs Group Inc. on Feb. 2 recommended buying calls expiring in this month before earnings. Equity derivatives strategists John Marshall and Maria Grant said “sentiment has moved too negative into the quarter and guidance is achievable,” citing telecommunication equipment analyst Simona Jankowski. Cisco calls had the biggest losses in the U.S. options market on Feb. 10, while its puts had some of the biggest gains.