Cisco vs. the New York Times

As a member of the press, I am acutely familiar with the habit of blaming the media for whatever ails America. In recent months, for obvious reasons, the financial press has become a popular target: It’s all that media doomsaying that frightened the herd and put stocks in the dumper, etc.

So, I was curious a few weeks ago to see what would happen when the New York Times squared off against Cisco. On April 18, the Times published an extremely pessimistic piece about Cisco by Gretchen Morgenson. So, here was one of the most credible business writers around, making a case in what is arguably the most influential media outlet in the world. (Tediously full disclosure: I knew Morgenson slightly when I worked at the Times’ Sunday magazine.) What, I wondered, would happen?

After the closing bell on the previous Monday, April 16, Cisco had “warned,” as we’ve all become comfortable saying. Specifically, it warned investors that it would not hit its quarterly sales target but would instead come in around 30 percent below the prior quarter’s sales number. (In an amusing side note, one provider of up-to-the-second market data started the next day with the headline “Market laid low by Cisco woes,” then quickly followed up with “Cisco no impediment to market.”) Cisco closed the next trading session at $16.66 a share, a relatively small drop of 3 percent or so that Morgenson termed “a yawn.” Apparently, she theorized, investors were more interested in Cisco CEO John Chambers’ optimistic musing about the future.

Her story’s focus was Cisco’s decision to write down a big chunk of its inventory “in the staggering amount” of more than $2 billion. In effect, she argued, the company was saying that inventories in this amount were, it turned out, worthless and that this spoke rather poorly of Cisco’s forecasting powers. “How much technological change was there in the past three months that made this stuff totally worthless?” asked one of her sources. A company is not supposed to be able to sell goods it has written off, but Morgenson passed along speculation that Cisco might use these materials in other goods it can sell, which of course would help its margins. (Cisco said it would do no such thing.) Whatever the explanation, Morgenson seemed to figure it could not be good news for CSCO, and investors were in “denial.” She concluded: “Its big product write-off, in short, makes Cisco look more cyclical than its growth-hungry investors might like.” Even though it’s way off its highs, Cisco still trades for about 45 times earnings.

Now, I have no particular stake in endorsing either Morgenson’s point of view or in defending Cisco from it. (Another digression: In Cisco’s headier days its stock was, I believe, the most disclosed holding in financial journalism history. Stock writers who were allowed to hold shares [some aren’t] were forever appending mentions of Cisco, then trading at over 100 times earnings, with a parenthetical “which I own.” Cisco was such an “it” stock for the last few years that claiming ownership of it was basically a sort of prestige disclosure. I thought about buying Cisco, just so I could disclose that I owned it. Well, not really.)

Anyway, what I was interested in was whether Morgenson’s article—be it prescient or Cassandra-ish—would knock the wind out of Cisco’s sails. After all, press cynicism is supposed to have caused all kinds of problems in the market lately. So what happened? The day her story was published, Cisco finished up slightly at $17.93. Of course, that happened to be the same day that the Federal Reserve issued its surprise rate cut, driving up stocks generally and messing up my experiment. I decided to wait and watch for a bit, and while the market has waxed and waned since the Fed’s cut, here is the bottom line:

Since the close of trading on April 17, the day before the Times’ negative piece ran, the S&P 500 has risen 5.8 percent through the close of trading yesterday. The Nasdaq is up 14.3 percent. But Cisco, in the weeks since getting dissed by the Times, was up 22.2 percent—far more sharply than the rest of the market. (Cisco reported earnings after the bell, so if you want to minimize the effect of any pre-announcement speculative run-up, you could make last Friday the cutoff, but the results are similar: S&P up 6.2 percent, Nasdaq up 14 percent, CSCO up 17.9 percent.)

No matter how you slice it, it’s a decisive win for Cisco over the forces of negative press. Not a very compelling result for the idea that financial journalists can move stocks at will.

As it happens, the inventory issue has not gone away and was a subject the company addressed (reiterating earlier points) in its quarterly earnings conference call yesterday. Cisco came in ahead of its post-warning “expectations,” but the profit drop-off was still steep  and in fact crossed over into loss territory if you figure in one-time items like the inventory. On the whole it was not a very upbeat announcement, and the stock traded down slightly after hours.

There is, of course, no way of knowing, as I write this before the start of trading Wednesday, what the market will make of this and whether Cisco shares will take a pounding or soar on the theory that it can’t get any worse and the days of mega-growth will come again. Either way, though, I’m pretty sure it’ll be the fault of some reporter or other.