Surveying the Battlefield of Cree (CREE)
Well, the lines are drawn on the battlefield that has become Cree (CREE). The company announces earnings next Tuesday after the close, and I can’t recall seeing so much diversity in outlooks. Simply put, somebody is gonna be wrong…very wrong. I don’t have a dog in this fight (i.e., No position), but I do think the fight is fascinating. Here is the break down.The Bears
Let’s face it — this Power LED technology company is almost universally hated, with 31.7% of the float short. That yields a short interest ratio of 9.4 — that is, almost 10 days of trading for all the shorts to cover. Eric Ross is the Director of Research at Canaccord Adams. He has been on CNBC recently, pounding on the stock as their favorite short idea because the company has low quality products and antiquated technology. Ross says the stock will plummet this year and has a price target of $16 (Cree closed yesterday at $26.31). Jed Dorsheimer is the Canaccord analyst who covers Cree. His model calls for $109 million in revenue and has been telling investors that his numbers are likely a bit generous, and that $105 million is more likely. He also has been advising clients that management will guide lower. Dorsheimer recently got an attaboy from Barron’s for his Sell rating on Cree. Since everybody seems to hate Cree anyway, I’m not really sure that Dorsheimer was blazing any new trails. Ah, but I digress.
Another notable bear is Hans Mosesmann at Raymond James. Mr. Mosesmann also projects that Cree will miss its quarter and has a price target of $8.
Chris Versace, who writes for TheStreet.com, has been covering the Cree story for the past several months, particularly from the mobile-phone angle. He wrote another bearish piece on Cree last week, noting that Cree faces an uphill battle because of shrinking margins in the LEDs used in handset backlighting. Versace also notes that handset backlighting has been one of CREE’s “key niches” in the mobile device industry.
The Bull
On the other side of the line stands, American Technology Research. AmTech is an independent research firm that has been the lone wolf on Cree. Andrew Huang, the AmTech analyst covering Cree, has a price target of $55. Richard Prati, CEO of AmTech, says that Cree will make its earnings and will probably guide higher. Further, he says that, despite what Versace claims, Cree does not stand to lose in the handset backlighting business because it is such a small part of Cree’s business.
Additionally, Prati notes that Lumileds — a subsidiary of Philips Electronics (PHG) — is having quality control issues and will not be shipping its power LEDs, which compete with Cree’s XLamp. Going forward, Lumileds’ loss will be Cree’s gain. Given the Lumileds misstep, timing could not be more fortuitous for Cree, which recently announced plans to expand capacity of its White XLamp LEDs. Prati believes that by the June quarter of this year, Cree will have triple the capacity vs. the prior year of these high power LEDs used for lighting. Further, Prati says that the current problems experienced by Lumileds illustrate that Power LED technology is not as simple as some folks believe, and that the intricacies of the technology will prevent the commoditization of Power LED technology by Asian competitors — which is something that Chris Versace has expressed concerns about in his recent piece.
My Take
Now, I wouldn’t know an LED from a knobby knee…but I have looked at a chart or two in my day.
The price action has been really sloppy over the past few months, which is the reason I stopped trading Cree. But a clear winner is about to emerge. Current resistance is at $28, which was tested on Wednesday afternoon. Current support is down at $24 — which was tested on Wednesday morning! With one third of the float already short, I’d be hesitant to join a very crowded bear den. After all, even an earnings miss may not be enough to keep the shorts short. If the bears begin covering those shorts, a move above $28 could spark a short squeeze. Of course, if Cree falls flat on its face, the bears could press their bets and drive the stock to a new low.
Which way would I play it? Happily, I have the luxury of staying out of the mud until a winner is declared. Because of the importance of the LED industry, there will be plenty of time to choose sides once a winner is declared. But my money is on Prati, who was telling clients to buy Cypress Semiconductor (CY) a couple of years ago when it was at $10 because it had just taken a big stake in a little known company called SunPower (SPWR), and who was also urging clients to buy a little known company named Research in Motion (RIMM) when it was trading for pennies on the Canadian Stock Exchange. Prati thinks that the stock can be up five-fold in the next year or two.
I’ll be happy to hear from any of the players who are covering this stock — Canaccord Adams, Raymond James, Chris Versace and Richard Prati — either before or after earnings are released next Tuesday. After all, somebody will get to crow about being right, and somebody will have to eat crow about being wrong.
So while the bulls and bears duke it out, I’ll be sitting in my armchair watching the action. And I’ll cover the stock again next week once the bodies have been removed from the battlefield.
Be careful out there.
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