I haven’t written about CREE in a while. In the year end tax selling binge, the stock briefly dropped below my SSL of $23, but I chose not to sell my 2,000 shares. Based based on where it is today, I hope you chose to hold on as well.
Just after the year ended, CREE made a very surprising and fairly robust rebound, heading from just under $22 to over $28 in six trading days. This, against of backdrop of every tech stock being taken out to the woodshed and beaten to death. What the heck is going on here?
The answer: sector rotation, and CREE is now perceived to be in the right sector.
As many of you know who have read my content on this company, I believe CREE has truly disruptive technology. They are the technology behind the new wave of LED light bulbs- destined to replace the incandescent light bulb we have all been using for over 100 years.
LED lightbulbs last 4 to 6 times longer than incandescents, and use less than 1/2 the power. The problem: cost- a regular LED lightbulb runs about $25 today. Despite being worth it, consumers have not shown a willingness to invest this much up front.
Nevertheless, LED lighting is coming. The transition away from incandescent is being mandated over the next five years by several European countries, and many feel the US is not far behind.
In fact, I was listening to Barrack Obama speak the other night, and he referenced sacrifices we would have to make to get energy consumption under control- he specifically stated we would all have to invest to “change our lightbulbs”. BTW- this is not a political commentary, so don’t bother commenting that you luv or hate him. Like it or not, it was on national TV in primetime.
CREE has patented technology for the chips that power LED bulbs. The price is expected to come down over the next two years quite rapidly, and CREE will get fees and royalties for every chip in every LED bulb.
Here’s the rub. For most of the second half of ’07, CREE was viewed as a “chip” stock, and semi conductor issues have been getting pounded.
In fact, the SOX index (semi conductor) is now trading down to levels unseen since September of 2004- that’s nearly 4 years of appreciation down the toilet.
Here’s what’s happened: the view of CREE has changed since the first of the year. As we turned the corner into 2008, the media began interviewing analysts and fund managers about their view of the right sectors for 2008. A common theme: GREEN- anything that saves both the environment and energy is considered green, and nearly all of them were touting CREE as a company embroiled in the green movement. With the democrats looking strong for late in ’08, green is even more “in vogue”.
To sum it up, the perception of CREE has changed from a chip stock to a green stock since the first of the year, and the proof is in the chart. Check it out:
Here’s a chart overlaying CREE and the SOX Index. I put CREE in green (yes, it’s symbolic). Note they traded pretty much in tandem in December, and look how radically they have diverged in January.
CREE- now widely accepted as a GREEN stock, is a great one to be in for 2008. It has been immune to the recent big blow off in the market because it is now a GREEN stock, and as such will trade with a much fuller market valuation.
I don’t know if it’s a buy for a trade right now, but it should definitely be accumulated on dips for a trade, and anytime it’s below $30 for long term investors.
Comments and questions are welcome.
GREEN and the SOX may be good, but that is really the only thing I see that is making this stock stay up. Its over 35X earnings, is LESS profitable than last FY, at $0.50 est earnings for FY’08 its over 50x earnings and for FY’09 its only down to about 30-35x projected…I am sorry, but IMHO without some BIG upgrades to improve the PEG, and/or buy recommendations CREE is just overpriced and a risk traders stock.
S.
Editor: As a semi conductor stock you are absolutely right. As a green stock I wouldn’t agree. Stocks in the right sector go up with little regard for traditional valuation metrics. As a green stock, it will command a much higher valuation as the market starts to price in the future of LED lighting. If it weren’t going to trade with an absurd premium, it would be a lot lower in this market. Nothing tech is getting a decent valuation right now.
From the most recent low of $21.70 on 12/18, this one is looking very strong headed into ’08 near the bottom of the Macro sell-off. Your point on divergence from the semi’s is huge, plain and simple. The statistical correlation with the SOX made me less secure. Now, decoupled, it is another story altogether. I also believe in being a contrarian with regards to analysts (our Merrill analysts were consistently wrong) and most don’t like the stock right now; hence, it is a buy, still, at 27 (resistance for traders). Are we looking at a 60 dollar stock in 18 – 24 months?
Editor: I am out of this one right now simply due to the market. I believe I need to be in the second half of ’08. Regardless of where anyone thinks it might go, LED lighting is going to be adopted, and CREE is going to make money on everyone sold. $50 is coming- just a question of when.
Your comment to your first blogger is dead on in my experience. I mean:
17-Jan-08 27.65 27.66 25.85 26.31 2,388,000
The market was hammered on 5.6 billion shares traded (nyse). So if CREE were a stock NOT being valued as Green, it too would have been destroyed. Such was not the case. The evidence is that CREE is being valued for what the future holds in LED…and they are the last pure play standing…
A greater premium is warranted.
Editor: Owing to the current market conditions, I am out of the stock, looking for a lower price to get back in. This is strictly a market driven call- not company driven. I still believe in a $50 price target.
I think cree has a bright future once the cost of standard screw-in led “light bulbs” comes down. But in your statement; “CREE owns the chip technology. There are a number of manufacturers of these bulbs, but they are incorporate CREE’s technology, and CREE gets a little revenue of some sort for every LED bulb manufactured on Planet Earth.”
My question is will cree actually receive some or any revenuve for all leds manufactured on Earth? I know that cree owns patents for it led technology but cree is not the only company that owns led patents. Some of Cree’s competitors have their own patented technologies and do not owe cree for the sale of their leds. Were you refering to Cree owning a corner of the market compared to it’s competitors?
Editor: I will have to look through some previous research reports to give you a concise answer. Will do so and publish in my next posting on the company.
Cree went below 30 this morning. In your opinion what price are you looking for to buy.
Editor: Awesome- I love $28.40. This is proof that a little patience pays off in a bear market.