Are Cree Inc. Short Sellers Hedging Their Bets Ahead of Earnings?


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According to a company press release , semiconductor concern Cree Inc. ( CREE ) will release its fiscal second-quarter earnings report after the close of trading on Tuesday, Jan. 18. Currently, analysts are expecting CREE to bank a profit of 51 cents per share, 19 cents better than company's profit of 32 cents per share in the same quarter last year. Historically, Cree has put in a solid fundamental performance, surpassing the consensus estimate in each of the prior four quarters, with an average upside surprise of roughly 10.5%.

earnings history for CREE

Expectations among options traders may be a bit on the high side for the technology concern, as CREE's Schaeffer's put/call open interest ratio (SOIR) of 1.07 arrives below 64% of all such readings taken in the past year. In other words, options traders have been more bullish toward CREE only 36% of the time in the prior 52 weeks.

Checking in with CREE's open interest configuration, we find that options traders are focusing heavily on the January 2011 70 and 72.50 call strikes. Currently, 11,342 January 70 calls are open, while 8,540 contracts reside at the January 72.50 call. On the put side, peak open interest totals 13,842 contracts at the January 60 strike, while another 10,797 puts are open at the January 70 strike.

January 2011 OI chart for CREE

Activity in the short selling community could explain some of the attention to CREE calls, however. Despite a 6.6% decline in short interest during the past month, 19.6% of CREE's float remains sold short. As such, some of the aforementioned call open interest could be the result of short sellers hedging their positions. Still, the 20.38 million shorted CREE shares could provide ample fuel for a post-earnings short-covering rally.

Wall Street, meanwhile, has plenty of room on the bullish bandwagon. For instance, 13 of the 28 analysts following the shares still rate CREE a "hold" or worse. Additionally, Thomson Reuters reports that the 12-month consensus price target for the stock rests at $70.94 per share, a modest 6.8% premium to CREE's close on Wednesday. Should the company post solid quarterly results after the close, there is room for potential upgrades and/or price-target increases that could bolster the bullish case for CREE.

Turning to the stock's technical performance, CREE deserves more bullish sentiment than is currently levied against it. The shares are sitting on a gain of more than 17% during the past year. While the stock is currently consolidating along support in the $66 region, CREE's 40-day moving average is quickly rising into the area, and could provide an additional springboard of support. The stock must still overcome resistance at the $73 level, which is home to its December 2010 peak, as well as the round-number $70 region. That said, a breakout above this ceiling could send CREE sharply higher, especially in the event of strong quarterly earnings report.

Daily chart of CREE since October 2010 with 40-day moving average

The winter 2011 issue of SENTIMENT magazine is now available here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Options

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