Cisco Systems (CSCO) No Longer a Growth Stock

Cisco used to be one of the great Internet/Technology growth stocks that was growing in the double digit range year after year. But that is no longer the case with revenue declining and earnings falling in the current quarter and projected to fall in the following quarters.

Cisco Reports

Cisco is set to report fourth quarter earnings after the bell today and could beat low expectations for the fifth time in a row. Analysts recently upgraded their expectations for the quarter from 28 cents a share to 29 cents a share. Yet this represents a drop of 28% from the same quarter last year.

Revenue

Revenue at Cisco is also declining compare to prior years with the current quarter falling 18% and the year looking to fall 9% overall. Cisco is considered a gauge of overall IT spending with it’s routers and switches fueling the growth of information sharing and the Internet itself. But these markets have matured while Cisco has tried to push into other areas with better growth.

Stock Rally and P/E

Cisco’s stock has rallied from a six month low of $13.62 a share to a recent high of $22.57. The stock could continue to move higher on expectations of a rebound in tech spending. But the numbers currently do not show growth and once the company’s price to earnings (P/E) ratio reaches an unsustainable level, the stock should return to levels closely inline with it’s growth rate.

GDP Beats but Revisions Are Rough

The market news today is mixed along with the action of the indexes. The GDP for the 2nd quarter of 2009 was better than expected but past quarters were worse than thought. I guess in the long run only the next quarter matters, the most recent is interesting, and the past are in the past.

GDO Revisions

The prior quarter’s revision from a poor –5.5% to an even worse –6.4% gives everyone pause but it really has no affect on the current situation and the markets are always looking to the future for buying inspiration. And that is what the -1.0% in the 2nd quarter should provide. The recession is ending after four quarters of negative growth in the 3rd quarter and some government policies are working like the Cash for Clunkers program.

Next Week Economic Numbers

Next week the market expects more mixed news with good numbers on Construction Spending, the ISM Index, Personal Spending, Pending Home Sales, Hourly Earnings, and Non-Farm Payrolls. But expectations are for worse than prior numbers for Personal Income, Factory Orders, and the Employment Rate.

I think the improved outlook for the US in the third quarter will outweigh all of the news next week with some volatility around better than expected numbers and worse than expected numbers.

Why I Purchased Goldman Sachs (GS) Friday

Last Friday I purchased Goldman Sachs Group (GS) as the markets quickly recovered from month lows and broke to the upside as earnings season got underway. This was after GS reported great earnings that beat expectations by 40% with analysts increasing their expectations for future quarters and the year.

Markets Jump

What a difference two weeks make? Prior to the start of earnings season the indexes were slowly falling to new month lows and signaling a sell. But a number of companies have beaten their expectations including Goldman Sachs (GS), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), and International Business Machines (IBM) giving the bulls reason to buy.

Earnings Expectations

The case for Goldman Sachs is fairly strong. For the quarter ending September 2009 analyst have increased their expectations for the company’s earnings from $2.08 a share to $3.30 a share. This is an increase of 59%. The stock itself has moved from $125 to $165 a share which does represent an increase of 32% but not equal to the earnings increase.

The Trade

The trailing price to earnings ratio is currently 37 with the forward price to earnings at 10. Earnings increases could reach 82% for the current quarter and 183% for the next quarter. These increases would make the P/E conservative. Analysts have an average price target of 173.5 for the year. With the markets moving higher and Goldman Sachs being one of the strongest in it’s industry, holding GS until the end of the earnings season is a trade that I wanted to make.

CIT Group Inc (CIT), Another Bank Fails

Just when you thought it was safe to buy financials, another back falls into bankruptcy and their stock goes to zero. The common stock of CIT fell close to 75% today as it struggles to stay afloat and looks for a reported $2-3 billion in financing. Along with CIT, insurers and banks are taking a hit with Aflac, Genworth, Lincoln Financial, and Conseco falling on their perceived exposure to the large commercial bank.

Overall Market Direction

Prior to the news of the demise of CIT, the market had rallied from a selling point around 1745 on the Nasdaq to a buy position above 1850 on the index. Over the week, the Dow Jones Industrial gained over 5% as the earnings season kicked off and investors felt better about the economy and company results. But the CIT news and weak regional manufacturing caused a pause in the rally for today.

If you feel like gambling, the CIT options have seen a large spike in volume today at Call strikes of $1 and $2 in addition to Put strikes on $1 and $2 in the closest months. Otherwise staying on the sidelines until there is a clear direction in the overall market is not a bad ideal. The markets could rally for a couple more weeks as good earnings numbers are released by varying corporations. But the downward trend is likely to resume as the end of the reporting season nears.

Amgen (AMGN) Jumps Higher in Shaky Market

Amgen moved higher today, close to 14%, on news that a bone-related drug trial had a positive outcome. But the company isn’t currently growing and the overall market is looking weak going into earnings season. The Dow Jones Industrial Average, the Russell 2000, and the S&P 500 have recently turned negative with the Nasdaq Composite looking to move into a selling position soon.

Denosumab

Amgen’s osteoporosis drug Denosumab was able to prevent bone injuries for breast-cancer patients in recent trials. The drug could possibly be a blockbuster drug and allow revenue to begin increasing again which has been flat to down in recent quarters for the biotechnology company.

Short Opportunity

The company’s current quarter is estimated to show a small increase in earnings compared to last year while next quarter is expected to show a 5% drop year over year. Revenue is set to decline near 5% for the current quarter, the next quarter, and the full year compared to the same periods in 2008. With the companies price to earnings ratio at 15.35 the jump in share price looks like a near term opportunity to short the stock as the new drug will not benefit revenue or earnings soon.

Alcoa Inc (AA) Breaks Down before Earnings

Alcoa Inc. (AA) moved lower on Thursday as commodities across the board struggled and the overall market fell as jobs data lead many to disbelieve the 2nd quarter will represent a turnaround in the US economy. The stock fell 4.73% to break below an early lower for the past 30 days of $10 a share. The company is set to announce their earnings on July 8, Wednesday of this coming week.

Revenue and Earnings

Revenue and Earnings estimates for the company have been reduced over the past three months with 2nd quarter earnings now expected to be a loss of 34 cents. This represents a decline of 151% from the earnings of the same quarter a year ago. Revenue is also expected to show a decline with the current estimate at a reduction of 48% compared to last year’s 2nd quarter.

Beginning of Earnings Season

The company has missed it’s earnings estimates the past three quarters, missing by 2 cents in March. The Alcoa report represents the beginning of the 2nd quarter earnings season which should provide the markets with direction up or down going forward. If both Alcoa and Chevron (CVX) provide disappointing earnings this coming week, the markets could fall for the week giving investors a trade for the final 2 days.

Southwest (LUV) Flies into New York LaGuardia

Southwest Airlines begins to fly into New York this weekend as the company searches for business travelers to increase revenue in a field that it has not ventured in the past. Flying into crowded airports where turnaround times are slower and most travel is for business is something the company does not have much practice doing.

Stock Price and Earnings

The stock moved 5% higher today as the overall market jumped on the prospect of a better economic 2nd quarter than the 1st quarter in the US. But shares of Southwest have be beaten down in recent months from close to $9 a share 6 months ago to a little over $6.25 a share recently. Revenue is falling 9% for the current quarter compared to last year and earnings are also falling 50% for the quarter on a year to year comparison.

Price to Earnings

The forwarding looking price to earnings (P/E) ratio for LUV is currently 15.05 and with the earnings decreasing, it makes an assessment difficult. With rising gas prices though and the economy yet to recover makes the short term future for the airlines troubled. Analysts have reduced their expectations for the current quarter from 19 cents to 8 cents over the past three months. For the current year, similar decreases in earnings expectations show analysts disbelief in any turn around in the near term.

Microsoft (MSFT) Moves Higher on Bing Optimism?

Reading Goldman Sach’s new rating of Microsoft from the Buy status to the Conviction Buy status makes one wonder if Bing is really all that much different than Live. Live was the companies previous attempt to get search traffic away from Google, while Bing is the companies latest. Goldman feels a price target of $29 a share is realistic with the stock currently at $24.07 a share after a 2.5% increase today.

Expensive Price?

The stock has had a very nice run from near $17 a share to the current price over the past three months. At it’s current level, the price to earnings ratio is almost 14 with the company expected to earn 8.6% less this year than the prior year and 5.8% more next year. Thus making the stock expensive unless you strongly feel the income will improve before the final earnings numbers are released. Yet the majority of analysts have dropped their expectations for the current quarter and the year over the past 90 days.

Research in Motion (RIMM) Tops 1st Quarter Estimates

The maker of the most popular PDA for business, the Blackberry, continues to improve it’s market share in the consumer segment. The company reported earnings today beating first quarter estimates of 94 cents. The company earned $1.12 per share on $3.42 billion in revenue. The income number included a one time tax benefit but the company still beat by 4 cents even without the beneficial item.

Solar Stocks Offer Risk Not Growth

Solar ETFs moved 4-6% higher on Wednesday as Oil prices continued to climb making alternative energy more attractive. But not all solar stocks are worth holding, in fact many are too risky for most investors. The Claymore/MAC Global Solar Energy (TAN) moved 6.2% higher while the Market Vectors Solar Energy ETF (KWT) moved 4% higher. The Market Vectors Solar Energy ETF (KWT) tries to duplicate the Ardour Solar Energy index while the Claymore/MAC Global Solar Energy (TAN) holds a number of solar stocks including First Solar, Suntech and Trina Solar.