EXCLUSIVE: Chris Versace's Call on Cree..

This originally appeared in the Thematic Investor

I am adding shares of Cree, Inc., a company that I have known for several years, to The Thematic Investor portfolio given the favorable reward-to-risk profile for this light emitting diode (LED) company, and because the company fits solidly within my Replacement Demand investing theme. That thematic looks for companies that are poised to benefit from cost savings and new market opportunities as its products and technology replace existing ones. A classic example would be how DVDs replaced VHS cassette tapes, flat screen TVs replaced models with tubes and digital photography replaced film and processing labs. In this case, LEDs are replacing other forms of lighting – ballast, fluorescent, neon and others – as brightness continues to improve and industry pricing falls, both of which have opened up new lighting applications for LEDs over the last several years, and there is little if any slowdown on the road to general lighting. Cree shares have fallen from the recent high of $72 to the current share price due to an inventory correction issue in Asia, which is pressuring margins near-term and resulted in a weaker than expected near-term outlook. Inventory days on hand climbed to 96 days at the end of December, up dramatically from 76 days at the end of June. As such, the Street currently expects Cree to deliver a modest dip in earnings in calendar 2011 to $2.03 per share before climbing to $2.69 per share in calendar 2012. Additional pressure was felt when recently public SemiLEDs (LED) reduced near-term revenue expectations in mid-January. While some may shy away from these companies, the long-term prospects remain bright, particularly as general illumination applications mature in the next few years.

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