An interesting look at the trading of CSCO on Wednesday of this week, form the Street.com
Wrong! Dispatches from the Front: Cramer Rides the Cisco Tiger Amid a Flood
of Information
By James J. Cramer
Everyone wants simple explanations to the price movements of stocks.
Journalists want them because their editors demand three paragraphs on why
Motorola went up or General Electric went down. Traders want them because
they want to know why they made or lost money yesterday. Investors want
them because they want to believe that the reason a stock went up or down
has something to do with the company's prospects.
Unfortunately, easy explanations are often wrong explanations. Usually
there is no price to pay for a journalist who gets it wrong, unless a nasty
riposte from me is considered punishment (and I definitely dish those out).
But for me, if I get it wrong, it costs me money. So I spend more time than
almost anyone on earth trying to understand these moves, so you have come
to the right place for answers, if there are any. Often there simply is no
explanation beyond "more buyers than sellers" or "a large buyer was very
aggressive and there was no supply."
Just as often, however, there is an explanation so convoluted, so
cumbersome as to defy editors, reporters, traders and the companies
themselves. Let's take the trading in Cisco Wednesday, which I am long and
watch like a hawk. Get ready to click a few times because Cisco's trading
Wednesday did not fall into any typical three-graf pattern, regardless of
what the articles in the paper say.
First, the background. Cisco is a giant, Nasdaq-traded technology company
that makes machines that allow computers to talk and transfer data back and
forth. It is the premier company in the business of networking and it has a
stellar record (yes, I am long it).
Intel, another colossal Nasdaq-traded technology offering, reported a
disappointing quarter on Tuesday that sent the chip maker's stock reeling
six points from the get-go. Intel is so important that naturally it clouded
all technology stock thinking and cast a pall over the group. At the same
time, Bay Networks, a competitor to Cisco, reported a good, not great
number, and the stock was looking weaker, as it was penalized for not
topping the whisper estimate.
Surprisingly, Wednesday morning, Paul Weinstein, an influential PaineWebber
analyst with a consistent knack for making people money, upgraded Cisco,
despite this disappointing backdrop of bad news from Intel and okay news
from Bay (please, I know Intel is a great company and I am long Bay, so
don't mistake those characterizations as slams).
Also surprisingly, Lucy Painter, a powerful Merrill Lynch personal computer
analyst, spoke incredibly positively on Compaq, specifically and pointedly
noting that Intel's problems are not Compaq's. (This call had massive
credence because Painter is perceived to be close to Compaq and Compaq
reports right on the heels of Intel.)
So, what would one expect Cisco to do? Not knowing how much downward
pressure would be generated by Intel-Bay, Cisco initially opened weaker,
down about a half a point, and flirted with 79 and change.
But in a few minutes Compaq started rallying. That emboldened traders to
take Cisco (including me), and the stock began rising the moment Intel's
stock stopped falling, rallying to $80.5, then $80.75 and then $81, when it
was clear the Bay news would not be a disaster.
As the market bounced down 70 points, the machines shut off, and traders
caught their breath, massive buying came into Cisco and it rallied to the
$82 level. Explanation for that one additional point? Painter's Compaq call
had raised that stock by a couple of dollars. Cisco has even less exposure
to Intel and buyers figured Weinstein was on to something.
Then about midday, with Cisco trading at $82.35 bid, it came over the tape
that Lucent, another telecom equipment buyer, was purchasing Livingston for
$600 million. Livingston is a competitor of Cisco's in developing remote
access solutions for companies. (Ed.'s note: Livingston is also a
competitor of Ascend. A story Thursday by reporter Kevin Petrie details the
impact of the Lucent-Livingston deal for Ascend.) That was my signal to
bolt from two-thirds of my Cisco that I had picked up, as Livingston
merging with Lucent was worse for Cisco than battling Livingston as a
free-standing entity (Livingston was rumored to be in talks to go public
sometime soon).
Sure enough soon after I got out at $82.25, the stock took a point dive as
a couple of research houses went out with exactly the above message. That
anticipation made me look awful smart, and I was thinking, whoa, am I a
flexible, nimble character.
Then within minutes of the stock going back to $81, GTE bid for MCIC. Cisco
started flying, and went back to $82. We made a few calls, and, sure
enough, GTE uses Cisco equipment, WorldCom uses equipment made by Ascend.
Savvy players, savvier than I am at least, had put two and two together and
realized that a GTE bid means a ton more business for Cisco than a WorldCom
bid.
But how could we be sure that GTE would win? Sure enough, as we scurried to
find out whether GTE would prevail, others took Cisco to $83.25, up $2 and
change, a smart decision, for it turns out that GTE is a $40 all-cash bid.
The day wrapped up with Cisco comfortably ensconced in $83 territory. I am
sure someone will say Thursday that Cisco rallied two bucks and change
because PaineWebber upgraded the stock. And to a degree that's true. But I
know my version represents a much better approximation of the truth than a
one-line squib about an analyst upgrade. |
