Retail Investors Swing Cisco

There was a time when companies went out of their way to attract individual investors. The theory was that your average investor showed more loyalty than the institutional holders, who were apt to dump a stock at the first sign of bad news.

That's no longer the case.

Retail investors are proving to be fickle and they have developed the clout to move even the mightiest of stocks. Just ask Cisco (CSCO), the third-largest company on the Nasdaq 100.

Cisco stock climbed 20 points in 12 days to reach a high of 115 on Monday, in anticipation of higher earnings and a possible stock split. Cisco, the leading supplier of Internet gear, reported profit growth of 33% Tuesday night. But it announced no stock split.

Not good enough. The stock fell and has continued to fall on heavy volume. On Friday, Cisco closed down 4 to 101 1/4 as over 27 million shares changed hands. The bulk of trades came fast and furiously, in tiny lots of 100 to 1,000.

"I've seen a change in the way some of the bigger names are played," says the head trader at a money management firm, who asked not to be named. And what is happening to Cisco heralds a general trend. "I think [bigger names are] driven by retail more than institutional" investors, the trader says. In fact, some brokers are less willing to make a market in large blocks of shares for fear that retail investors will move the price before all the shares are traded.

"You're seeing a lot of retail trades with Cisco," says one tech trader. "It's basically retail selling, and not a lot of institutions are buying." Indeed, this time many institutional holders are staying firm.

"Almost every institution I know has Cisco as a core holding," says Mike Duran, analyst with Lazard Freres. They might lighten up or buy more, but "I have not spoken to anybody who believes it should not be a core holding." Duran's firm has no banking ties to Cisco, which he rates a buy.

A Cisco official did not return a call for comment.

In the past year Cisco has become a favorite of individual investors, whose penchant for quick trades contrasts with the lock-and-hold strategy that large money managers use with the company. Last month 78% of Cisco's shares were traded in blocks smaller than 10,000 shares, according to Nasdaq, up from 72% one year earlier. Average daily volume has increased slightly, from 16 million to 18.7 million shares.

An overall surge in online trading contributes to this trend. Piper Jaffray estimates that retail investors made 27% of their trades online last year, up from 17% in 1997.

Some online retail investors were plenty upset that Cisco did not split its stock. While it doesn't alter a company's valuation, a stock split is seen as a bullish move because it makes the stock cheaper to purchase. On the Yahoo! Finance message board, one participant wrote yesterday: "SHORTS RIGHT; CHAMBERS IN ERROR FOR NOT SPLITTING."

Equity analysts continue to urge institutional clients to invest in the stock. "Across the board, [Cisco's earnings result] was solid," says Duran. "There really wasn't much to complain about."

But as more online players exert influence, solid earnings may not be enough.

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