There was a time when our portfolio consisted of nothing other than fertilizer stocks. The pie chart above shows how little we diversify when the going is good. "Cramer, we own MOS, POT, CF and AGU. Are we diversified?"
In July 2008, the fertilizer stocks broke down, and we knew the market was done for. We got out and sat on the sidelines for a few months, eventually scaling into a few Ultralong index positions. We got into these positions a bit too early (never expected the market to drop 60%). Nevertheless, they became profitable, so we continued to hold. We let them go yesterday, putting us back to an all cash position.
Since we sold the fertilizer names back in mid 08, other than index ETF's, we haven't owned another stock since... until now.
We said we would wait for new innovation before investing again. We've found something that's piqued our interest, although granted it's not the next "internet" or "biotech" revolution.
This is a smaller innovation, but the size of its market is phenomenal. It is LED lighting.
Currently, the overwhelming majority of people still buy incandescent bulbs. They've been around for 126 years, so it's a tough habit to break. But this is about to change.
The 2008 energy bill has a section that phases out incandescent lightbulbs for residential applications by 2014. The phase-out begins in 2012. Everyone will be forced to buy CFL's or LED's. CFL's are in the running to replace incandescents, but they are less efficient than LED's, and most of them are not dimmable.
LED lighting has a bright future. But how to capitalize on this information? To do this, you'll need four tools. The first, and most important tool, is patience. This is not a short term trade. LED stocks should be bought and held for about 2 years. The second tool is a basic understanding of fundamental analysis. Right now, these stocks are all overpriced. More on that later. The third tool you'll need are the charts. Being that we'll be investing heavily in LED stocks, we'll be posting charts of the major players in the LED sector on this blog frequently.
The fourth tool you'll need is a basic understanding of the companies that make up this space.
We invite your commentary on which companies are playing "behind the scenes" roles in this technology.
Our understanding of it is that CREE is the largest pureplay in the space. While Philips (PHG) produces LED lighting, as a rule we avoid companies that are not pureplays. The basic concept behind this is that if 4% of a company's business doubles, you're not going to get much out of it. This precludes us from buying AMAT, which is involved in LED technology as well. They've got their hands in so many different businesses that even if they become the leader in LED, their architectural glass division (for example) will mitigate their success. Who needs that?
While CREE is the largest and most visible of the names, it isn't our favorite. We've had better luck in the past betting on the second or third companies because they often have more room to grow. Back when fiberoptics were heating up, we loaded up on SDLI, buying only a small stake in the 800lb gorilla, JDSU. Those of you who've been around long enough to know these names know that JDSU eventually bought SDLI.
You can also do well buying the guys down the chain... the material providers and such. If you look into the LED space, you'll find that Aixtron (AIXG) and Veeco (VECO) are two such names. Our favorite stock in the LED space is AIXG (see its chart above).
Ok, now back to fundamentals:
All of these companies are expected to have excellent earnings growth over the next 5 years. Hence the name, "growth stocks". Naturally, growth stocks come with higher P/E ratios because P/E's are a direct function of growth. As a rule of thumb, a fair value for a growth stock can be calculated by multiplying its annual growth rate by 1.2, then by multiplying that number by its EPS. The number 1.2 is known as a PEG ratio. Warren Buffett's stocks typically have PEG's of approx 1.1 to 1.2. Although your stocks as a growth investor will have higher P/E's than his, you should be content if you're paying the same PEG as he is.
So let's do the math for CREE:
Let's say it will grow by 25% a year for the next 5 years.
25 multiplied by 1.2 equals 30
CREE's current EPS is .79
CREE's EPS next quarter should be .96
30 multiplied by .79 is $23.70
30 multiplied by .96 is $28.80
A fair price for CREE right now would be somewhere around $27
Now let's do the math for AIXG:
Let's say it will grow by 25% a year for the next 5 years.
25 multiplied by 1.2 equals 30
AIXG's current EPS is .32
AIXG's EPS next quarter should be .42
30 multiplied by .32 is $9.60
30 multiplied by .42 is $12.60
A fair price for AIXG right now would be somewhere around $11
------------------
Seeing as how CREE is currently trading at $56 and AIXG is currently trading at $33, it's tough to pull the trigger. Certainly if the market corrects, these "momo" stocks will get hit hard and fast, giving us a great entry point. Then they'll bounce back as quickly as they fell, making new highs long before the market itself.
So do we wait to buy CREE at $27 and AIXG at $11? No. Unless there's another economic meltdown and market panic, you won't be that lucky. Even if these stocks correct, they won't go that low. This is for two reasons. First, corrections take time. By the time the market corrects, we'll be further ahead in their fiscal year, giving them higher EPS's. The above figures would have to be recalculated. Second, the above figures are conservative. What if these companies grow by 30% a year, thereby deserving of a P/E of 36?
You can't be a value investor and a growth investor at the same time. You have to accept that you're going to pay up for growth and popularity if you want to ride the train. But that doesn't mean you have to buy at the very top. Wait for a dip and buy some. Then wait for a broad market correction and buy some more. Scale into your position as the market drops, and as the stock gets reasonably close to a price that you're comfortable paying for it. Then have patience. If you're going to hold it for a couple of years, then you have to believe in it. Your belief in it, according to Peter Lynch, can be a very simple thing. What intrigues us about LED lighting is the sheer number of lightbulbs that need to be replaced over the next 4 years. Basically every light bulb in the world will be replaced. Think about that. Then hold your LED stocks through thick and thin until they become a household name.
We waited to see if LED would catch on before deciding to start scaling into it. The reason is that the growth market is largely a popularity contest. Two companies with identical books can be treated very differently in the same market. Whichever one inspires awe in people will win the race. (Then go to zero, of course.)
We welcome any commentary about LED stocks or our investing methods, as always. If you know of any other new innovation that looks promising, please let us know about it as well.
Let's work together to triple our portfolio values!
46 comments:
Since your focus is on the lighting industry and innovation, you really need to take a look at ESL (electron stimulated luminescense) technology and the company that's developing it, Vu1 (http://www.vu1.com/). They are targeting this summer for the initial launching of their first product, an R30 reflector bulb, used mostly for recessed lighting and spot lighting. They are also working on developing a tube-styled light bulb using ESL. On their website they have 2 videos, the most recent demonstrating their current prototype, a screw-in bulb. They are now working to reduce the size of the bulb. ESL lighting is energy efficient; fully dimmable; has the light quality of an incandescent; is resistant to temperature extremes; contains no toxic materials; and is expected to have a spot price less than comparable LEDs.
The company has considerable debt, but has two flexible financing deals in place that allows them to finance their debt and to continue development operations while continuing to look for additional financing. I've been following this company for over a year now and, though there is still considerable risk from an objective standpoint, I've been convinced that these people, who have very impressive resumes, know what they're doing and are going to see this through fruition. They have put much more of themselves and their own money into this than is commonly seen and they stand to lose tremendously if this company fails. We shall see, but it's definitely worth checking out. I believe they can give LEDs a run for their money.
I'll also add that right now LEDs are not a good choice for recessed lighting due to their size and the need for heat dissipation. That is why Vu1 is starting with a bulb for recessed lighting. Likewise, their next bulb will be a bulb in the style of florescent tubes, without the mercury. As far as I know, no one has come out with a tube-style LED bulb and there are still a lot of florescent light fixtures being used in the world.
Thanks for the information. We hope that this blog picks up steam so we can all trade strategies and ideas such as these.
We just looked into VUOC.OB, and although the company and its concept look very promising, its stock leaves a lot to be desired. This may change someday, but it doesn't meet several of our criteria. As a rule, we avoid penny stocks. We also avoid low volume stocks. There is virtually no information available on its fundamentals, making it a huge gamble. We believe that a large part of what makes a stock successful is its popularity. Many stocks have become "ten baggers" while experiencing negative earnings. This is a result of the forces of human nature, which is by far the market's single most powerful influence. This is just the reality of the stock market. A stock must be discovered before it can rise to any fame, regardless of the fundamentals of the company. If this company's stock starts to hit the radar screens of more investors, it may someday be worth a more serious look.
Thanks for responding, and I certainly understand your skepticism. As a rule, I, too, don't invest in penny stocks. After my research on Vu1, including many email exchanges with their Chief Marketing Director, I became convinced that the potential opportunity here is too good to dismiss. Besides Vu1's products' potential, I'm confident that, in the very least, the share price will rise later this year as they submit for UL and Energy Star testing and get closer to their product launch. The share price has seen a high of $1.41 per share and I'm confident as real news is released the share price will at least reach that high again. That would be more than a 100% gain in less than a year. And that's a conservative minimum. This is, of course, my opinion, but I have good reason for it.
Their marketing approach has been starkly different than most penny stocks I've looked at, and some I'd bought into in the past when I did invest in penny stocks (and why I don't now, with this exception). Vu1 rarely issues a press release unless it's an SEC filing. This has kept them in good graces with the news media (for example, the NY Times has already publish a major article on Vu1, which can be found on their website), which has a very discerning eye toward upstart companies due to their propensity for BSing investors. As Vu1's CMD told me, right now, as far as their PR is concerned, they are focused on getting the word out on ESL technology, but not so much the company and the products it's developing. This will all change when they're ready for their product launch. I think it's a smart marketing approach to take.
I'll also add that one of the two financing deals they have in place is through Mr. William B. Smith, founder and CEO of SAM ADVISORS, LLC (http://www.samadvisorsllc.com/about/ourteam.php) who is no fly-by-night Wall Street investor. He owns close to 10 million shares of Vu1 stock plus the financing deal.
Some of Vu1's people were invited to Congress and met on the Senate floor with various senators, whom Vu1 will meet with again when they begin production. This is the type of info they will not publicize when most penny stocks would.
Let me apologize for my apparent "pumping." I came across your blog and thought I should inform people interested in your blog about Vu1. I'm not so foolish as to believe that pumping does any long term good. This company will live or die on its own merits.
Thanks for the opportunity to post this and I look forward to seeing other investors' ideas, particularly on new innovation.
i have nothing to add to this blog, as i have absolutely no experience with stocks and am only learning at the moment. I have enjoyed reading your responses especially your reasoning behind it.
one thing i am looking into and may possibly invest into is a short of the US 10-year note. Inflation has to come sooner or lator and when it does the value of those notes will decrease. Snotwheel can i have your opinion on this?
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Speaking of green tech, there's a company I like a lot that doesn't immediately come to mind when talking green technology but will be heavily relied upon when updating the electrical grid and that's General Cable (BGC). The share price has been lagging somewhat due to mediocre 4th quarter earnings, but the company is well-run, has a strong international presence, is diversified in its cable products, and is poised to benefit greatly as more and more money is poured into modernizing electrical grids across the globe, and this includes tying in alternative forms of energy. They even make cable specifically for nuclear energy. Their p/e is a mere 12 and I see this company doing well for many years to come.
I know this isn't about LEDs, but new info on LEDs will be relatively slow in coming and, besides, I believe this is a good opportunity worth sharing.
DD, we'll have to keep an eye on vu1 in that case, although it may be a while before the stock reflects the merits of the company. BGC looks like it's closer to having its day in the spotlight, but earnings are expected to be lower in 2010 than they were in 2009. If it really plays out this way, it won't be a buy for a while.
The LED stocks are off to the races, unfortunately. It's hard enough to buy something that you think is overpriced without having to watch it continually go higher.
Hopefully we get a pullback sooner rather than later.
Bobby, welcome to the blog. We have no opinions about the 10 yr note, but do appreciate your participation here. If you're planning on betting on the course of the overall economy, we'd suggest you keep tabs on unemployment and interest rates. It all hinges on that, and to a lesser extent oil prices, for the time being.
Thanks, Snotwheel. Just to follow up on both Vu1 and BGC, today Vu1 filed an 8-K regarding a recent advance from one of their financing deals (Full Spectrum), but what I took as a positive sign is that top officers in the company have accepted stock in lieu of cash as part of their compensation package. I see these quiet actions on the part of a company in Vu1's position as good signs of insider confidence, putting their money where their mouths are, so to speak.
Regarding General Cable, it was announced yesterday that Oppenheimer is investing a big chunk of change in General Cable. They bought 5.7 million shares, almost 11% of outstanding stock. That is roughly $170 million. Now, that's what I call a vote of confidence.
I realize that their guidance for this year is down, which explains their current share price being relatively low. I suppose it depends on a person's investment style. I have a moderate position in the company and plan to add to that throughout the year. I've been invested/following them for a couple of years now and they are very conservative in their guidance estimates and believe they are lowballing their most recent estimates. I don't expect them to set the world on fire this year, but purchase orders will roll in quickly once the world begins the planned investment into revamping the world's electrical grids into smart grids. If you apply the same time horizon to BGC as you plan to with LED companies, I think you'll have a winner, with the added advantage that the share price is considerably lower (p/e) than the leading lighting companies going full bore into LEDs.
Yes, LED companies need to be watched carefully at this point and, as you suggest, a pullback would be the time to pounce. I like Philips, but have resisted buying into it for the reason you mention, its diversity. It's still a good company but, for example, their electronics division has been hurting their bottom line for a few years now. To their credit I like their management.
CREE will do well. I wish I had bought shares when the share price was lower. I thought about it, but just didn't pull the trigger. You know how that goes. I'll continue to look for a good entry point. Are there any other pure plays out there that have piqued your interest in the lighting sector? What about Sylvania?
Good to see you are back and active Snot, keep posting, I'll be reading. Thanks.
General Cable, was on my watch list a few months back. They have over $8.50 cash per share but a big short position over 8%. Has this been volitile since u owned it? Tks, Bri.
I'm an architect by training and can see that snot is on to something big here.
not a pure play in LED but what do you all think of VSH? (posted this by mistake in the previous post)
Thanks,
firefly
Bri, yes, for reasons that aren't all together clear to me, General Cable is a fairly volatile stock. It's volatility is on a day to day basis. However, its long term trends are pretty consistent, more dependable, if you will. I suppose there are just a lot of people trading the stock. I do it myself on occasion. Unless you're trading it, it's one of those stocks best left unwatched. But the price is very cheap right now and it has a promising future, my reasons for liking it in a nutshell.
Another update on General Cable. BlackRock has followed Oppenheimer's example and bought over 5 million shares of BGC, 10.13%. These 2 announcements must be why the share price has been rising this week. Very good.
Bill Paul wrote an article for Seeking Alpha that talks about Cree. CREE had been his "one alternative energy stock pick" last year. He still likes the company, but thinks the share price is a bit high after rising 300%. He looks at it as a good takeover prospect. I'm a little doubtful that that's in the cards. Of course it's possible, but I wouldn't invest in it for that reason. I do think it's a good long term investment if you can buy in at a good price.
It's hard to say whether or not a takeover would be good for Cree investors. The easy answer would be good for short term investors and bad for long.
Cree's in a good long term position with its catalog of LEDs, but they've got stiff competition from that bigger, better funded lighting companies. Time will reveal all.
Not to sound like a stuck record (I guess that saying is now a bit outdated), but this underscores why I like Vu1 so much. They won't be competing directly with the big players. If they can sell their technology to the public, they will own a sizable piece of the lighting world. Now, they would be a prime candidate for an acquisition, for better or for worse.
To sign on to a stock like BGC, it would have to show signs of hitting people's radar screens. We'd like to see some relative strength first. All the fundamentals in the world mean nothing if no one is buying the stock. We're going to keep our eye on it because you've given it such a good review, but despite our conservative nature, we are definitely momentum-driven investors.
VSH looks promising, but it is priced for perfection. If it hits next year's numbers, it should be the price it is now. There's no room for error. We think that the market has gotten ahead of earnings right now, and investors should wait for a 10% broad market correction before buying.
DD, Cree has gotten ahed of itself, as most stocks have. On a pullback, it's worth buying a small stake and holding on.
We don't think the larger lighting company's stocks will benefit from the upcoming switch to CFL/LED. Only the pureplays will be held up as examples of the prosperity of the space. Then, of course, they'll all go to zero:)
We've been waiting for a broad market correction on which to buy these LED stocks. Our feeling is that investors have too quickly forgotten how bad the economy was 9 months ago. How is everything better already? Better enough for higher oil prices and talk if higher interest rates? Analysts have set earnings expectations high. But nothing ever really recovers that quickly.
We feel that Alcoa will only be the first in a long string of companies to give the market a dose of reality this earnings season. We're hoping that enough companies miss the inflated targets to bring the market back to the mid to high 9,000's.
If it does play out this way, we'll be looking for relative strength in our stock picks. Those with a wish list of stocks, some prices in mind, and some decisiveness may just be able to seize this opportunity to make 2010 a great year for their portfolios.
Of course it may not play out this way, but if you set up scenarios like this, someday you'll be right. And it only takes one time being right to make all the difference. If we're wrong and the market continues higher without us, then we'll just have to set up a new scenario... and so on and so forth. At some point, we'll get in on a dip and ride the next wave.
Analysts expected Alcoa to make 6 cents per share and instead they made 1 cent per share.
It's 10 minutes into the trading day, and the market is only down 53 points. We're suprised it isn't worse. People must be doing the math backwards. They're probably thinking that the news isn't bad considering Alcoa was losing 50 cents a quarter last year. We're doing the math differently. We're wondering how on earth, making 1 cent per quarter, is Alcoa going to make $1.00 per share in 2010 to justify its $17 price tag? Are they really going to start making 33 cents each quarter from here on out? Hard to believe considering they only made 1 cent this quarter.
thanks Snot for your insight! much appreciated.
Cheers,
firefly
The new megatrend: Electric Mobility. That means: lithium batteries.
Detroit Motor Show: Tesla Roadster, Toyota Prius, Audi E-Tron, Subaru Hybrid Tourer.
Strong players in the battery market:
Saft Groupe (France)
Sanyo Electric (Japan)
BYD (China)
Sociedad Chimica (Chile)
Greetz from Germany,
newfrankyboy
Snot,
what is your take on STEC?
It was off from their October highs and rebounding back recently. Deutche bank predicts 1 year target of $36 couple of weeks ago and their disater proof solid state memory technique seems to be quite promising among peers.
Any opinion???
No time to comment at length now, but we've seen a real crack in the LED's today. We just bought a starting position (approx 7% of our portfolio) in CREE at 53.88.
If the market itself is on the verge of a correction, the high flying momo stocks will get hit hard and fast in the early stages of the correction and then they'll rebound earlier and make new highs first. If you wait for the bottom of the market's correction to buy the momo names, you'll be buying them well off of their bottoms, and perhaps even at new highs.
We believe that the LED stocks will correct further, hence our limited exposure as of now. However, we know from experience that buying momo stocks is not an easy game. It's never "comfortable" to pull the trigger. You just have to seize the opportunities as they present themselves and average into the position as the stocks become more attractive. We would not be doing this if we thought the LED craze was nearing an end. We strongly feel that these stocks have another year or two to prove themselves.
Snotwheel, I fully agree with you on the perils of the short term market. Stock prices have moved up too fast too soon. Though it's still early in this earnings season, early indicators suggest that investors have been over-confident in the market's rebound. I believe we are in for a correction, or perhaps a protracted flat period where the market just moves horizontally. Now it's just a matter of finding stocks that are poised for more growth despite the overall slowing market. Those stocks will probably be found in technology, companies that will be relied upon to help revitalize the economy as a whole with a focus on energy efficiency. I'd add to that energy stocks, though choosing the right ones is a challenge at this point. I like natural gas.
Companies that are heavily invested in developing and marketing LEDs should fit the bill. I'm going to hold off on CREE for a while longer and just keep an eye on it and the market. Also, As previously mentioned I'm big on the new ESL lighting technology by Vu1, though even if its introduction to the world later this year turns out to be a real head turner, it won't affect Cree's bottom line, certainly no time soon if ever. It's just that there's no comparison between Cree's room for growth and Vu1's. The difference, of course, is that Vu1 is still very risky at this stage.
I will say that I got an email from the owner of a lighting store that is big on LEDs (WattWorks, Inc, Columbus, OH). I had to1d him about Vu1 and their plans to release a R30 sized bulb by this summer. He wrote me saying that Cree has that market covered with their LR6 and that Vu1 should instead develop a PAR 20 for 3&4 inch cans. I looked up Cree's LR6 and saw that it was priced around $80.00. Vu1 is planning to price theirs in the $20 range. But, again, I'm not advising anyone to factor in Vu1 when considering an investment in Cree.
I wanted to ask you if there are any other LED pure plays that you are watching. You stated earlier that Cree wasn't your favorite and that you prefer pure plays. You had also mentioned companies that supply materials for LED lighting. Just wondering if you are following any other pure play lighting companies that are pushing LEDs. Thanks.
There is no way CREE is worth anything near what it is now. Absolutely no way it is gonna get away with trying to be AAPL or PCLN in the LED world. What you have to keep in mind is that at any given moment another company (such as GE) could come along and literally smash CREE with a more efficient LED (more lumens per watt per dollar). It is indeed only a matter of time before someone does. And I'm willing to bet that if GE does crush CREE, they will probably make more money from CDS's on CREE than from actual LED sales. lol. Talk about utter humiliation. Just wait till the big banks aim their guns at this sector... rest assured they will be getting in at the ground floor. And $50 for CREE is not ground floor.
In addition, a lot of sell signals have been generated this week across all sectors of the market. (Except for the drug companies.) If this market rolls over, you can kiss goodbye all the hot air that is levitating CREE.
By the way, LED lighting is a ponzi scheme, because more energy is consumed in the making of an LED bulb than will be saved during its useful half-life. Yep, just like PHEVs.
DD,
We like Aixg and Veco. We like CREE less so, but only because it's the go-to LED name. It is a pureplay, unlike GE, Philips, etc.
We're keeping tabs on vu1, and agree that it looks promising, but it's early.
We bought CREE today because it got hit the hardest of the LED's.
If this turns out to be the start of a real market correction, then our buying may seem premature. The reason we start layering in when a stock is only off by 10% is because momo stocks are very unpredictable. They sometimes get hit really hard in the early stages of a correction, and that's the best price you'll get. Even if the market struggles for the next 4 to 6 weeks, the strongest momo plays will not go lower than the first several days of their corrections. We're not saying this happened today. If these stocks drop another 10 points in a matter of a couple of days, then we may actually see a bottom in these names, despite being on the onset of a 10% broad market correction.
Icon,
We like your opposing viewpoint on this blog. There wouldn't be a market without it.
To play devil's advocate with you, we have to point out one really important thing...
You have to differentiate between a company and its stock. They are two different things, and are only loosely connected.
We agree that CREE is not worth $50, or $40, or even $30. But we're not value investors. We're investing in CREE for what it symbolizes. Do you really think it mattered to people buying YHOO at $100 that it wasn't "worth" $100? In fact, it didn't matter that it wasn't "worth" $100 until it got to $600.
This phenomenon doesn't have to make mathematical sense. It represents the forces of human nature at work, and they are singlehandedly the most powerful influence on a stock's price.
We aren't trying to buy low and sell high. We're trying to buy high and sell higher. There will be a point where someone will be left holding the bag with these stocks, as is the case with all stocks. Our bet is simply that that time hasn't come. We don't find out about the next hot stocks before others, but we profit from not being the last people to find out about them. We ride the second half of the wave, and have been successfully doing this for many years. All along, we'll openly admit that we overpay for everything. But it's ok because we'll sell it to someone who's a bigger idiot than us. The whole market works on the "bigger idiot" theory, or at least that's as complicated as it ever needs to get.
CREE reports January 19th at the close. Any predictions on earnings, revenue and guidance and the market's reaction?
earnings calendar
It's funny you mention yahoo because CREE and YHOO both bubbled up in pretty much the same way back in 98-99. Both were 10-baggers in a given 12 month period.
When it comes to bubbles and parabolic moves, I prefer to think of markets in terms of the 100th monkey effect. The bubble starts with cheap money and an obscure idea. Then the idea percolates, and it sounds good to enough people. Indeed it sounds plausible, and is even backed by a certain amount of truth. The tech bubble was backed by the "truthful fact" that during several months of 1995 and 1996, the internet was doubling in size every 6 months. The tech bubble grew and grew as statistics like that got passed along. By 1997 it was no longer true, the rate of growth was slowing. But in the mainstream mindset, none of that mattered. Until the hundredth monkey realized what was going on and then sold. Same thing happened with MBS's. By 2007, the hundredth monkey had his foot in the door.
Now can something similar happen with LED lighting? In order to see the potential of a new bubble, we have to separate possible from probable. And there has to be a grain of truth to seed the cloud. Can an LED light really be 8, 10, 12 times as efficient as an incandescent? From what I've seen, 8x is believable. 10 is stretching it. 12 is fantasy.
I'm pricing decent quality LED bulbs for about $8-9$ per watt. That's about 1 dallar per Incandescent Equivalent Watt (IEW). (If a bulb costs $1 per IEW then it takes $60 to replace a 60 watt incandescent bulb.) Some cheaper bulbs are 80 cents per IEW, such as the $11 ones from four seasons lighting at Home Depot. They advertise 25 IEW but that of course is a lie. Its more like 12-15 IEW, so you have to use 4 or 5 to replace one 60 watt bulb.
That pricing is outrageous, but that's the reality. What could drive a market given that kind of arm busting pricing? What is the perception? Well for one thing we've all seen how CFLs have come down in price. I was an early adopter who paid quite a bit of money for my first CFL. How about nowadays? Just a few months ago I bought eight 13 watt CFLs for a buck a piece. That is 2 cents per IEW! 2 flippin red pennies! Note that even when CFLs were new, they only costed 20 cents per IEW. That's 10 bucks to replace a 60 watt incandescent. Not too bad for newer tech. LED lighting isnt anywhere close to that. However, we're at a point right now where the general public thinks that LED lighting is simply the next technological step. LEDs will replace CFLS like CFLs replaced incandescents. And the internet is doubling every 6 months. And we'll have 15% renweable fuel (ethanol) by 2010. People love to believe that stuff. But it's just not true. CFLs havent even replaced incandescents yet. And its not becoming any more true. CFLs are becoming cheaper even faster than LEDs are. This notion that LEDs are the next step is not supported by the facts on the ground. When the hundredth monkey realizes this, these stocks will come down hard. The market is a measure of deception. The more money being made off people's ignorance, the bigger the parabolic move. I just dont think its gonna happen with LEDs. The anectdotal isnt there. People buy these bulbs and they complain and ultimately stick with CFLs. And CFLs are the prime target here, not incandescents.
Unfortunately for LEDs, CFLs are pulling ahead now in a big way. Mercury or no, people will compromise at 2 cents per IEW. I've done the math on LEDs. You'd save maybe 30 bucks a year by switching from CFL to LED in all the high traffic areas in a typical house. (Nobody in their right mind is going to spend $50+ on a light bulb for a closet or pantry. At least I'd hope not.) At a cost of $500? $1000? The sky's the limit really. I can break down all my numbers but it is imho so absurdly obviously a scam that I see no need to break it down any further.
LEDs do make sense in certain niches. But CREE isnt trading at $50 in hopes of capturing a niche market.
Icon,
Thanks for the well-thought out post. We think you're missing one thing, though. Of course if people had a choice between a $1 incandescent bulb and a $50 LED bulb, they'd choose the incandescent ones across the board. Except, like you said, in certain niches. Are you forgetting that by 2014, incandescent bulbs will no longer be available to the public? They are being phased out in a government scheme to improve energy efficiency. It's this little fact that intrigues us, and many others, about the sector. If incandescents were always going to be an option to the consumer, we would not be betting on CFL's or LED's. And for the record, we are not choosing LED's over CFL's. We're simply betting on the phaseout of incandescents. If you can find a pureplay in CFL's, we'd definitely be interested in that stock, too.
One more thing...
Our bet on LED's is simply a bet that people are underestimating the sheer number of lightbulbs in the world. Sounds simple, but that's all our bet represents.
Right now, you've got several massive companies supplying the world's lightbulbs. In 4 years, all of that demand will quickly be shifted to a handful of small companies. Frankly, they'll likely be in a position to not even be able to meet the demand at first. What an enviable position to be in... this is like getting into AOL on the ground floor! Of course AOL dropped the ball, but it ran for a good number of years beforehand.
What are the main commodities further down on the food chain for both LEDs and CFLs? Did someone mention Mercury in these discussions?
How will these small companies compete with GE over the long haul? GE makes LED's and CFL's.
http://www.lumination.com/
It's hard to believe that a person can be so wrong so often about so many things, but Icon has turned me into a believer.
Concerning VECO: (from the CREE message board: Citigroup equity research issued a note to clients early Tuesday raising its estimates and target price on shares of Veeco Instruments (VECO) citing checks which suggest stronger than expected LED tool shipments in the first half of 2010. In addition, Citi analyst Timothy M Arcuri said that "On the back of these higher estimates, what should be a very strong set of results, and some recent overblown negative speculation around the addition of Samsung as a customer, we are adding the stock to Top Picks Live, Citi's list of highest conviction ideas. We are raising F2010 revs/EPS from $585 million/$1.62 to ~$660 million/$2.00 (consensus $1.39). Additionally, we now see revs/EPS of $770 million/$2.36 in F2011 (vs. old $595 million/$1.44). While the stock is up big off the '09 bottom, the stock is still only trading at 16x our C2010 EPS and 14x 2011 while it only trades at 5-6x EBITDA - hardly onerous compared to LED peers (>25x EPS) or even semi cap names.
Is it any wonder that Icon's a teacher?
His last post certainly verifies the old adage.
We have to start researching the "food chain" to find the real gems. Whether its mercury or silicon, this is research that we should all be focused on now.
Thanks for the VECO information, Anon. We are torn between VECO and AIXG because although we like AIXG for being better known, we are a little turned off be AIXG's low volume. VECO doesn't suffer from this. We're looking to buy a starting position in VECO very soon. The CREE we bought the other day is now up 15%. Not sure that's a good thing, as it makes it hard for us to buy more! Hopefully a broad market correction comes to our aid. The seesaw movement of the market over the past few sessions suggests indecision on the part of investors. It's kind of a "wait and see what the next earnings report is" kind of market. Not a safe market for those heavily invested in index funds one way or the other.
I never said I was shorting CREE, nor would I. Nor would I short AAPL or PCLN though I think they are worthless also.
Keep in mind that CREE's guidance is based on an amplification of unreality. Just like the broad market is pricing in 6 quarters of 5% GDP growth, CREE is pricing in growth that simply is NOT going to be there. There is no way they will meet their projections 3 quarters from now. However, I did notice that the top of CREE's channel points to $80 by April, with the center of the channel hitting in june. I also noticed that june 2010 calls were only 30 cents at the 80 strike. If you're going to play a channel trade of a highly speculative nature such as this, why put so much money at risk? Why not just spend 1/10 the money on the option, and keep the rest of the money in a safer place? That's how I've been playing anyway. My last two trades have only been for a relatively small amount.
By the way, CREE may be doing ok, but the market cracked further today. We go down from here. I am 100% sure of that. 6 weeks from now the market will be at least 5% lower than here.
Icon, we agree that the market is due for a correction. In fact, we're hoping it happens very soon.
Can't agree that AAPL is worthless. It's overpriced now, and we feel that it'll be at today's price a year from now. PCLN is garbage. William Shatner was the final nail in its coffin.
As for CREE's guidance, we are not as concerned with its numbers 3 quarters from now as we are with its numbers in 2013. We're longer term investors than the average folk today. That isn't to say that we'll be holding until 2013. If all goes according to plan, CREE should top out sometime in 2011. Then it'll go to zero.
I take back what I said. I took a look at their guidance issued 10 years ago. It's the same sort of pie in the sky nonsense we're seeing today. I'm purchasing $2000 worth of march 45 puts, and $3000 of march 50 puts. If CREE goes to 50 within two weeks I'll make about 20k. 10k if it goes to 50 in 4 weeks. I'm hedging this with $1000 worth of NLY feb 18 calls, currently trading at 10 cents. The rationale behind that hedge is hard to explain. Basically, CREE needs the bubble to continue, ie QE2 or whatnot, and if that happens then NLY is poised to break out, easily quadrupling the value of those calls, and allowing me to exit the CREE trade with little or no overall loss. This is currently my only exposure to equities aside from some SRS feb 8 calls I bought yesterday.
'In 4 years, all of that demand will quickly be shifted to a handful of small companies.'
republicans are returning to power and republicans hate those new light bulbs. all green initiatives will be scrapped and replaced with 'drill, baby, drill.' you can't make long term plans anymore based on politics.
88888888's
Snot, how can one say that the production of these light bulbs will shift to a few small companies when monster companies like GE are making these bulbs?
'Republicans are returning to power'?? LOLOLOLOLOL
Anon, would you buy a GE (good enough) product? Kidding, but seriously, it doesn't matter who wins the CFL/LED race. That only matters in the very long term. We're intermediate term investors, meaning we'll hold for about 18 months to two years. Four years from now GE may emerge the market leader in LED, but it doesn't matter to us. We really don't care what happens in the LED space. We only care about riding the "potential of LED" wave. Those who invested in the "potential of dotcom" did well. Those who tried to stick it out by guessing who would "win" got burned. You gotta know when to fold 'em. Stick around, we'll get you out at just the right time. Then we'll short them with you... there's absoultely no loyalty here:)
What a crook you are...why not tell the people that you are heavy short seller? running hedge fund...short seller? do not buy those stocks...short as much as you can NOWWWWWWW! do not listen to those crooks !!! snot...kill yourself .
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