Cree (CREE) has posted two consecutive negative
earnings surprises and has seen earnings estimates slide. The
stock has a Zacks Rank #5 (Strong Sell) and is today’s Bear
of the Day.
From Bull to Bear
Just three short months ago, the prospects for CREE were much
better. In fact the stock was a Zacks Rank #1 (Strong Buy)
and was highlighted as the Bull of the day on July 16.
This was before the company posted two negative earnings
surprises. Each miss was $0.02 in dollar terms and
approximately -6% below the Zacks Consensus Estimate.
Company Description
Cree makes lighting-class light emitting diode (LED),
lighting, and semiconductor products for power and radio-
frequency (RF) applications. Cree was founded in 1987 and is
headquartered in Durham, North Carolina.
Estimates Moving Lower
The company had a lot of earnings momentum heading into the
summer. In February of 2012, the Zacks Consensus Estimate
for 2013 stood at $1.37 and then bounced higher to $1.50 in
March. The consensus kept rising and reached a peak of $1.59
in July. Then came the first of two earnings misses.
August saw the Zacks Consensus Estimate slide from the peak
the previous month to $1.44. Two months later, estimates had
again slipped to $1.32. That round trip move isn’t quite
lights out, but prospects have clearly dimmed.
Valuation
A company that has missed two straight earnings releases
usually has a lower valuation than CREE. The trailing PE
multiple of 57x is more than double the 21x industry average
as is the forward multiple of 46x when compared to the 19x
industry average. That sort of premium is usually reserved
for companies that BEAT estimates, not miss them. Price to
book is in line with the industry average, but on a price to
sales metric, the company again is trading at 2x the industry
average.
So why the big premium? Well CREE is slated to grow revenues
at a rate of 16% next year and that compares very favorably
with the 3.2% industry average. Earnings growth is slated to
be even more impressive with a 48% improvement in earnings
vs. a 28% gain for the industry average.
The Dreaded Double Top
I try to avoid most of the technical side of investing.
Mostly I don’t do it because I am bad at it, but I do know a
few things. A double top for CREE is a technical term that
suggests that the stock tried to reach new higher highs, but was denied. Technical analysts would say such a formation is a negative.
Investors might want to look at other stocks in the same sector with a better Zacks Rank. One example of that is Greatbatch (GB) which is a Zacks Rank #2 (Buy).
Brian Bolan is a Stock Strategist
for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he recommends the
stocks in the portfolio.
Brian is also the editor of Breakout Growth
Trader
a trading service that focuses on small cap stocks and
also
carries
a risk limiting strategy. Subscribers get daily emails along
with
buy, and sell alerts.
Follow Brian Bolan on twitter at
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