PALO ALTO, Calif. (CNN/Money) -
The best news of the day is that all those pundits who told you Cisco's performance doesn't matter anymore -- and there were many -- were wrong.
It turns out that investors, no matter how many times they are told otherwise, want badly to believe that Cisco holds the keys to overall market nirvana. Thus investor perception trumps market reality, in the short term anyway.
In the medium and long term, however, reality matters. So let's have a look at the reality, both of Cisco's numbers and the overall state of the market.
"An in-line number creates the illusion that everything is okay," is how one source of mine with a bias toward short-selling characterized the reaction to Cisco's earnings report.
But we don't know that everything actually is okay: Cisco was purposely and exceedingly vague about making forecasts because it still sees no signs of recovery, just hints and hopes.
In addition, consider that Cisco isn't much of a growth company anymore. It's not really meaningful to look at year-over-year earnings having tripled (not to mention pro forma earnings beating estimates by two pennies). Cost-cutting and year-ago inventory charges dampen that comparison. Revenues are up just 2 percent since the same quarter last year. That's an apples-to-apples exercise. And there's no growth forecast to make growth investors feel better.
Note, too, that even after Cisco's giant surge Wednesday (the stock ended up nearly 25 percent at $16.27), the shares have come back only to about where they were a month ago. Put differently, Cisco's shares are barely back to their pre-Sept. 11 levels -- and a long way from their early 2000 highs in the low $80s.
What's up with the rest of the market and its huge gain? Relief, mostly. The Nasdaq had been down 13 days running, and giddy short-sellers were forced to close out their positions as the rally took hold early on.
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RECENTLY BY ADAM LASHINSKY
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"I don't really think it's justified," says another another short-minded source commenting on Wednesday's rally. "They rarely are. These sorts of things are inevitable in bear markets. With most earnings announcements behind us, investors won't be getting a lot of new information. But how quickly can we escape the effects of the bursting of the biggest bubble in our lifetimes?"
Yes, the economy is firming. Yes, inflation is tamed. Yes, earnings likely will be better than horrible. (See Justin Lahart's cogent explanation of why.) But that doesn't return the growth of old. It doesn't mean analysts are about to start slapping $1,000 price targets on Internet stocks again.
It means only that traders who have hair-trigger sensibilities about how to react to days like today will prosper and that investors who've been in the market these past two years are still way down.
Having said all that, it feels awfully nice to be up, doesn't it?
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.
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