Optimism springs eternal in Cisco shares ahead of results

NEW YORK/CHICAGO – Cisco’s earnings have had a way of crushing the dreams of optimists in the last two years.

Shares of the computer networking giant have often rallied ahead of its earnings report, sparking bullish sentiment among options players, only to fall sharply after the company fails to meet lofty expectations.

There are fears this will happen again when the company reports results after the close of trading on Wednesday. The stock has been on a roll, rising more than 50 percent from a 52-week low to levels not seen in a year.

“There is a lot of optimism from option traders heading into earnings,” said Joe Bell, senior equity analyst at Schaeffer’s Investor Research in Cincinnati. “If the results do not meet expectations, there may be a lot of downside.”

The day after five of the last six earnings reports, Cisco Systems Inc shares have been hit hard. The stock fell 10 percent on August 12, 2010, 16 percent on November 11, 2010 and 14 percent on February 10, 2011, according to Reuters data.

The one exception in the last six quarters was in August 2011, when the shares gained 16 percent the day after results.

Wall Street expects Cisco to report a stable quarter, buoyed in part by improving enterprise demand in the United States.

Cisco has outperformed its peers this year, rallying 11.7 percent, and options activity has been tilted to the bullish side.

Heading into Wednesday’s earnings report, investors bought 3.61 calls for every put on three U.S. options exchanges as new positions over the past 10 trading sessions, according to Schaeffer’s data. That gauge clocked in higher than 79 percent of the readings taken during the past year.

Sentiment in Cisco is among the most optimistic in the S&P 1500 index, “so even a slight disappointment in earnings could whack the stock,” said Jason Goepfert, president of SentimenTrader.com in Minneapolis.