Cisco (CSCO) - Get Report investors, already giddy from watching their stock rise 50% in the past month, expect the company's fiscal first-quarter earnings report Wednesday afternoon will keep the good times rolling.
Like rival networking gearmakers
, Cisco has enjoyed an eyepopping rally off October's 52-week lows, driven by a marketwide shift in tech investing sentiment.
Against their better judgment and lacking evidence of improvements in demand, liquidity or ordering trends, some hardened tech bears are now buying these beaten-down stocks. The alternative, they suggest, is watching a rare and long-awaited rally pass them by.
Yet for all its impressive gains, the current networking run-up has signally failed to vanquish the widespread skepticism that has long plagued these mostly shrinking companies. Indeed, even after the recent gains, few traders and analysts believe we're seeing the beginnings of a sustained upward trend. And so regardless of what the crowd thinks, there's still a chance all the fun could come to an abrupt halt as all eyes turn to Cisco.
"Cisco is going to make or break this rally," said a New York hedge fund manager who was trading in and out of Cisco this week.
Cisco as the stock market's bell-sporting sheep is hardly a new concept. Long before the communications equipment market fell into its current state of disarray, Cisco was the tech investor's favorite indicator of just how strong the industry might be.
Investors are still looking to Cisco for signs, but the company's numbers are no longer likely to bowl anyone over. It's widely believed that Cisco had a poor September and a strong October, which suggests the company will just make Wall Street's consensus estimates. Those call for earnings of 13 cents per share on $4.5 billion in revenue. In the year-ago quarter, the company earned 4 cents on revenue of $4.4 billion.
But more importantly, if the rally is to have any chance of continuing, say traders, Cisco's outlook for the second quarter has to be at least vaguely sunny. For the second quarter, Wall Street expects flat earnings on a modest rise in revenue: earnings of 13 cents and revenue of $4.9 billion.
"Flat to up, and we keep rallying," said one trader at a large Wall Street shop. "If it's down, see ya."
While investors may be willing to believe a flat outlook suggests we are skipping along some kind of a bottom, any downward revisions are likely to trigger a fast return of that old sinking feeling.
So what's fueling this rally, one might ask.
No Pain, No Gain
All logic suggests that the phone companies that buy gear from the Lucents and Nortels -- and to a lesser degree Cisco -- are poised to continue their painful cost cutting through 2003, as they attempt to pay down debts and shore up shrinking businesses.
As one hedge fund manager said: "In the past few days, we saw
go from $5 to $6, and I said 'OK, it's short-covering.' But then it went from $6 to $7, and then from $7 to $8. This is coming in, people are buying this stuff."
Instead of sitting it out, the investor was buying some beaten-up old names like
So what's really the logic?
"Things were getting too negative," said the hedge fund manager. "It was time to start buying a little bit."
Let's see what Cisco says about that.
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