Click chart to enlargeWith all of these growth stocks, there comes a time when it gets hard to even draw a channel on them because their charts start to look parabolic. If you switch from an arithmetic chart to a logarithmic chart, you can straighten the chart out and see it more clearly. The strongest stocks look parabolic even on a log chart. Any stock that looks parabolic on a log chart is a strong sell in our opinion. No company can sustain that kind of growth. The numbers just get too big.
CREE has not gone parabolic on a log chart yet, but has definitely done it on an arithmetic chart. We can only draw a trend channel going back about 5 months on an arithmetic chart of CREE, as pictured above. Regardless of how you draw the channel, you have to admit that CREE is a tempting sell. If we were heavily invested, we'd be lightening up a bit on these shares. Considering we're only partially invested, we're going to ride it out. Based on the trend channel, CREE could reach 75 before needing any kind of a pullback. At 75, we'd be very tempted to take some off the table in an attempt to repurchase those shares at a lower price within a week or so. There's only so far a stock can go before people start taking some profits, and CREE is definitely in the nosebleed section at the moment. We'd feel more comfortable with it if it were just running parallel along the yellow line. It's a double-edged sword because we like to see the relative strength, but at the same time we don't want the stock to overheat out of fear that a sharp drop could rattle investor confidence. The best thing CREE could do is go sideways for a month while the market goes lower. That would take a lot of the risk out of the picture.
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CREE now represents 20% of our holdings, up from a recent 16%. We didn't buy more, it's just from its appreciation. In theory, if the stock did nothing but go up for a few years, it would eventually be 99% of the value of our portfolio, dwarfing the other cash we have. That would be nice.
Snot, seeing that CREE has gone up almost 4 times in one year's time and VECO has gone up approximately 7 to 8 times, how do you determine that instead you buying for 2x what they are worth and selling for 5x what they are worth, that you might be on the edge of the bubble yourself.
CREE
VECO
Joe,
That's the tricky part. It's a two-step calculation. First, you have to estimate the approximate quarter at which the company's earnings growth will top out. Earnings GROWTH that is, not earnings themselves. We estimate that for the LED companies, this may be sometime around mid 2011.
Then, you have to work backwards, realizing that a stock tops out 6 to 9 months before its earnings growth tops out. In this analysis, you have to account for how far above a fair P/E the stock is.
For example, if the stock is trading at the yellow line (center of the channel) 6 to 9 months before its earnings growth tops out, that's the perfect time to sell. If it's trading at the bottom of the channel at that time, you can hold out a little longer (wait for a surge in the broader market, then bail).
If the stock is trading at the top of its channel (the red line) 12 months before the top of the company's earnings growth cycle, it's safe to take your profits and run.
You definitely don't want to be long when they crash. Ideally, you can go short when they simultaneously and decisively break the bottom of their trend channel and their moving average.
The first such selloff from the top is not the time to short. You want to short when the stock breaks down after a failed attempt at new highs.
We don't have a lot more time to ride the CREE train. If it were summer and we were at the top of the channel as we are now, we'd be bailing on it. We do think CREE will see triple digits before heading to zero, and we think that'll happen within the next few months.
Thanks for the explanation. If you have time, you got an opinion on someone parking some money long-term in Master Limited Partnerships instead of leaving it in cash? E.g., BWP, CPNO, WMZ, DPM, HLND, EPB, MMP, MWE, KGS, OKS, RGNC, SEP, NGLS, TCLP and WES. They pay high dividends and their business is based on the volume of gas and oil, not the price.
And one last article on energy storage: http://finance.yahoo.com/news/Pros-Follow-Buffett-Into-indie-3380620171.html?x=0&.v=2
I've been holding a sizeable CREE position since $20, but I've been thinking this is a hold for the next couple of years. I see potential for a real ten-bagger--i.e. $200... as LED will grow exponentially, so I'm not sure why you'd sell now...
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