Talk about a momentum stock on steroids. Cree reports earnings on Tuesday 1/19/10 after market close. Let's look at the fundamentals first. Cree makes semiconductor materials and devices for LED lighting products. Cree has superb growth. Last quarter, revenue grew 20% to $169 million and EPS grew more than 300% to 30 cents, beating analysts' expectations by 36%. And this wasn't the first time either. Cree has never missed EPS estimates in any of last 5 quarters.
Currently, 21 analysts follow the stock and 20 of them have either Buy or Hold rating. Today, analyst Morgan Joseph downgraded the stock from Buy to Hold and provided the following commentary:
"On Tuesday after the close of trading, we expect Cree to announce F2Q10 sales and non-GAAP EPS of $186mm and $0.29, respectively, essentially inline with Street expectations of approximately $187mm and $0.29, respectively. We expect LED sales to continue driving revenue growth for Cree, with strong demand for indoor and outdoor lighting solutions. We believe the company has hit an inflection point with global opportunities and that the potential in the LED lighting and fixtures market is significant. The largely indirect impact of the stimulus thus far is likely to continue, in our view, by raising awareness on LED lighting and Cree's business. Given our belief that the adoption of LED lighting and fixtures is likely to drive Cree's revenue higher than ourprevious estimates reflect, we are raising our CY2010 estimates to $827mm and $1.25, from $817mm and $1.20, respectively. We are also increasing our CY2011 estimates to $1.08bn and $1.75, from $985mm and $1.50. Our expectations for CY2009 remain the same."
No question the growth is there, but with stock trading at 49 times FY 2010 estimates, I happen to agree with the analyst call above. Given the history of stock's tremendous out performance since October, I believe even if Cree simply meets the expectations, the stock could still get sold off on profit taking. We're standing right at the rising support line. A break below $57 could take the stock to $51-52 area where the 50-day moving average stands as well as the prior support. But all bets are off if Cree rips higher and takes out $60 on above-average volume.
I'd play this to the downside going into earnings. Specifically, I'd sell Feb 60/65 Bear Call Spread as following:
Buy-to-Open Feb 65 calls
Sell-to-Open equal number of Feb 60 calls, for a net credit of $1.50.
