The stockmarket is surely unpredictable. My prediction that LED
Cree Inc. (Nasdaq: CREE)
, one of the stocks in my $100,000 real-money portfolio, would meet
or exceed fiscal second-quarter estimates, turned out to be off the
mark. The company trailed both top andbottom line forecasts, and
issued fairly tepid third-quarter guidance to boot. Still,shares
are up more than 4% in today's trading as investors are
(correctly) focusing on the bright long-term view.
An update on my $100,000 Real-Money Portfolio
Now that two of my $100,000 real-money portfolio holdings,
and Cree, have both reported, I look forward to hear what
Zoltek (Nasdaq: ZOLT)
has to say when the company releases fourth-quarter results in
mid-February. Third-quarter results were strong, but this company
delivers an erratic set of results, so my long-term bullishness is
in tandem with the possibility that fourth-quarter results may just
As you may remember, I recommended
of Zoltek on Jan. 5 at about $7.70 a share. If you bought
when I recommended the stock, you're already sitting on a nice
gain. But since I give readers two days' notice before making a
purchase, the stock has since gotten away from me, so
I'm currently awaiting a better entry point
[Don't miss a thing --
sign up here
to receive the latest updates and additions to
David Sterman's $100,000 Portfolio
On the other hand, I'm expecting a solidquarterly report from
when fourth-quarter results are delivered in late January. That's
because the auto maker posted solid sales results in November and
December in the United States, more than offsetting the weakness
seen in Europe. The consensusEPS forecast remains stuck at $0.26,
despite a recent stream of good news. Don't be surprised to see
Ford earn $0.30 or even $0.35 a share this coming quarter.
However, Ford could decide to establish a conservativeprofit target
for 2012, soshares won't necessarily rally when results are
released. Still, I love the long-term positioning of this company
and am not holding for short-term gains.
Now, let's dig a little deeper into those Cree results...
Cree's fiscal second-quarter lagged expectations. Sales of $304
million, though up 13% sequentially, were lower than the consensus
estimate by $5 million, andearnings of $0.25 per share were a penny
shy of forecasts. But management cautioned investors that the
current quarter won't represent a big sequential jump as the last
quarter had. As a result, third quarter guidance was softer than I
expected, and sales are likely to be flat with the second-quarter
(though still up more than 30% from a year ago). Yet persistent
pricing pressures will keep a lid on profits. Cree expects to earn
around $0.18 to $0.25 a share, below the $0.27EPS earned in March
2011 and the $0.29 a share analysts had been expecting.
When I recommended this stock, I cited a pair of important drivers:
stable gross margins and falling inventories. The results are mixed
on that score. Gross margins fell to 35.3%, from around 36% in the
fiscal first quarter. Had they been in line with the prior quarter,
Cree would have exceededprofit forecasts by a few pennies.
Management is still targeting a rebound to 40% gross margins six to
12 months from now, a level seen in the recent past, but I am
dubious of that forecast.
Part of thegross margin weakness stems from the fact that Cree has
too much capacity. Its factories are working at just 60% of their
potential output. So management has announced plans to sharply slow
new capacity additions and let demand catch up. That may be why
management expects to eventually see a solid rebound in gross
On the plus side, inventories fell by $16 million sequentially and
now represent a more reasonable 85 days of sales outstanding (from
92 days in the September quarter). I'd still like to see that
number move closer to 70, but the trend is promising.
The tepid quarterly results shouldn't alarm. After all, this stock
has plunged from around $70 a year ago to the low $20s, so
expectations remain quite low. To put the dim outlook in context, I
repeat what I wrote back on Jan.10 in
my initial analysis of Cree
: "It may look quite cheap at just 12 times consensus fiscal (June)
2013 forecasts of around $1.80 a share. But I want to take a much
more cautious stance, anticipating per share profits of just
$1.50." I expect the consensus forecast to come down to my forecast
in coming weeks, though this stock remains inexpensive, even
against that lower view.
Action to Take -->
My investment thesis remains intact. Cree's results should
strengthen later this year as LED adoption builds. My hopes that it
would happen as soon as the current quarter have been dashed, but I
remain steadfast in my view that this former highflyer will see
better days ahead.
Stay tuned... I'll be delivering another investment idea and adding
it to my portfolio later this week. Remember, you're invited to
trade right along with me. I'll even give you at least a two day
head start. Don't miss a thing and
sign up to receive my latest ideas for free
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CREE, F, AA in one or more if its "real money"
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.