Click chart to enlarge CREE is taking a small hit today after beating expectations. How many think it's going down because people expected better results? How many think it's going down because it was at the top of the channel? Of course we believe the latter, but it's just a difference in philosophy with no change to the actual outcome (the bottom line). We believe that if CREE had dropped to the bottom of the channel in the days or weeks heading up to the earnings report, it would have soared upon its release. So then is it good news or bad? Like all stock market news, it's neither. It just depends on where the market is when it's released. But we digress.
The point of this post is that we sold CREE a short time ago at 76 something, saying that there's little risk in selling near the top of a channel. Although we didn't catch the very top (you rarely will), we didn't exactly get locked out of the stock either. While it's tempting to buy back into CREE based on it having a bit more strength than we had anticipated, we still feel it's richly valued. We're no stranger to paying up for growth, but we'd rather wait for a really bad day in the broader market and steal the shares from someone standing on their window ledge. You're not getting a bargain buying CREE 6 points off its high.
27 comments:
Snot,
Thanks for the chart. Would you consider to get back in once it hits around $70? I am looking to get in with a few shares and maybe $70 is a good entry point.
If this is the case, VECO could get hammered as well after earnings are released. Can't wait for it to happen so I can buy more
We might consider buying back into CREE starting in the low 70's, but we'd be a lot more interested in focusing our buying during the next broad market correction.
VECO could get hammered at its next earnings release, or it could soar. It has less of an earnings track record than CREE, so it's more of a wild card. Its valuation is far more reasonble than CREE, so we don't think it'll suffer at earnings release unless it really disappoints badly. We don't see how this is possible given how its success is tied to the success of LED's in general, and by all accounts, the LED market is steadily growing.
Hi,
So much conflicting information. You believe CREE dropped because it was at the top of the channel, not because of the earnings announcement. VECO is at it's top, or beyond, but you are implying the earnings could actually affect it's movement. Why would it be any different than CREE and the channel
Anon,
Well, yes, we believe that CREE dropped because it was priced for perfection... high in its channel, well above its moving average, and at a high valuation. The risk outweighed the reward.
It's true that VECO is high in its channel. If it weren't, we'd be buying more of it. Unlike CREE, however, VECO is not overvalued looking 3 to 6 months out.
We're willing to pay a P/E of approx 25 to 30 for a stock we like. By this yardstick, CREE should be trading in the 50's.
Company specific news does affect a stock's movement in that it's a catalyst for a move. The direction and magnitude of the move, though, has more to do with where it's trading just before the news is released.
If you believe that stocks are news driven, then the "news" that LED companies were not blowing away estimates should have affected all of them equally.
VECO could have dropped 10% today in sympathy with CREE, but it didn't. Valuation is the reason for this.
Snot, my guess is that everyone who frequents this blog understands that a variety of factors can affect the movement of a stock's price: news, valuation, being overbought versus oversold, government policy and its effects, and Icon's smoke-filled backroom manipulations. All of this is Wall Street 101, freshman course. For you to affirm that valuation is important is worthwhile. For you to contend that news is irrelevant is ridiculous.
Joe, don't get us wrong, we know that company-specific news is very influencial on a stock's price if the news is anything out of the ordinary. News of creative accounting, disasters at a factory, etc, of course directly affect a stock's price. We are just very skeptical that "news" affects the broader market in any real way. First of all, we believe that the majority of market fluxuations are choreographed by that very small handful of people that pull the strings. Furthermore, the news that we all hear is not likely the truth behind why the market is behaving the way it is. If the market were to drop 800 points tomorrow, rest assured the real reason for the drop would not come to light for another few quarters, if ever. The financial news folks would pick the top 5 worst news events of the day, convene in a board room and decide which one was the most likely trigger. Then we all hear the "news" and are just supposed to believe it. Those select few brilliant financial minds (the likes of which even the SEC's brightest individuals cannot compete with) are surely capable of orchestrating the market's movements and telling us lemmings sympathetically WHY the market did what it did. The real reason the market moved a certain way is because GS wanted it to move that way. The "news" is just a legitimate cover for internal shenanigans the complexity of which our brains are not capable of processing.
Hi Snot,
Great call on CREE, but seems like the stock is very strong, could go back to 82 in a few days. I have a position in VECO and would like to add to it before earnings. At what price would you say is a good entry point before earnings? I did see that you said it is a wild card but some analysis would be appreciated. I guess we wouldn't know until the day of earnings, I do remember you said the only thing that matters before earnings is how the stock moves. If it goes up like CREE, it would drop. If it goes down somewhat, it would most likely soar. Given the market condition, my guess is VECO would be around 50 before earnings, would you buy before or after earnings at this price?
Thanks. Love to hear your break down of scenerios.
James
So valuation doesn't matter either? It is just GS moving the whole market? Is "Icon" your other handle in addition to Steelelana?
Joe, you might benefit from keeping a more open mind and not taking everything so literally. It may be a hard thing to accept that you're just a flea on the dog, but when you finally do and go along for the ride, it can be a great ride.
Snot makes a lot of sense and you must agree or you wouldn't keep coming back to his/their blog.
Joe,
The majority of people that tackle the daunting task of investing their own money in the market fail miserably. This is because our natural instincts are contrary to what is usually the right thing to do. Add to this the myriad of traps and misinformation, sensational news items and creative acts of accounting, criminal activity and herd mentality... the individual investor doesn't stand a chance of seeing past all that noise.
As in many endeavors, investing in the market requires rewiring one's brain to be in sync with the reality of the situation in all of its complexity. As for the market, the difficulty many people have is that they approach it too intellectually. In other words, they fail to accept that it is a living, breathing, emotionally-driven collective human machine, far closer to our gut than to our intellect. The way we view the market may seem odd to many, but it is not by choice. It was born out of a process of trial and error on our part, culminating in the virtual elimination of just about all widely accepted relevant investment information.
What we are left with is a simple set of rules that have proved to us to have more impact on a stock's movement than all other factors combined. When we say that the news doesn't affect the market, it's not that we entirely believe that, it's just that it's like factor number 12, so don't worry about it. If you could make a list of the 100 most important factors affecting a stock's performance, only the first three would be worth factoring into your investment decision. In our experience, we've found the first three to be:
1.) Relative strength
2.) Relative strength
3.) Relative strength
Anon,
VECO has less of a track record than CREE, which is why we think its next quarter or two are very critical. CREE has four quarters of consistent, positive earnings behind it. VECO doesn't. VECO is the smaller fish about to prove itself. We are confident that VECO will do well because CREE's report suggests that LED sales are not faltering. As for buying VECO ahead of earnings, it all comes down to how much of it you already have. If we were holding none of it, we'd buy some right here. We feel it is fairly valued. If 100% of our portfolio were in VECO, we'd be selling half of it ahead of earnings. Fortunately for us, we already have a healthy stake in it (approx 35% invested). We may add a little, but we're hitting our personal limit on how much we're willing to put into a single stock.
It is good practice to not go into any earnings report overexposed because anything can happen. You just have to be comfortable that your positions jive with your own tolerance for risk. That's a very personal thing. We may buy a little here and there, but nothing major. Our next big buying spree is going to come during the market's next correction, which will inevitably happen before year end. If the market doesn't correct substantially by October, then we'll go on record saying October will be brutal. It often is. Good luck with whatever you decide to do with VECO. All we know is that unless something drastic happens in the company, we plan on holding it for another year or so, adding on dips caused by broad market corrections whenever the opportunity presents itself.
So, Snot, it is like your real estate profession: location, location, location. What do you think of RBCN via relative strength? And Jerry, .... ah, never mind. Have a good day.
We haven't looked at a chart of RBCN in a while, but it is extremely strong. It's got all the relative strength of VECO, maybe then some, that's for sure.
RBCN has negative earnings for the past 4 quarters, but perhaps that trend will change when they report next Thursday, the 29th.
RBCN is like an earlier version of VECO. We like the mid range companies... not the 800lb gorillas, but not the extreme P/E versions either. RBCN currently has a P/E that is incalculable. It may fulfill its promise to investors and do extremely well over the next several quarters so that its earnings can catch up to its price, giving it a fair valuation. But somehow these early cycle companies remind us of the dotcom era, where promises of growth were all that mattered. Actual earnings were irrelevant. We don't think RBCN falls into this category, as investors today are more careful than then were back then. Pure unbridled speculation is not the theme in today's economy. Therefore, we strongly feel that RBCN will rise to the occassion and post some very impressive results. The problem, though, is that if/when we get caught in a broad market correction, the stocks with the highest P/E's (and especially incalculable ones) get hit the hardest. This is because at the start of the correction, no one knows how deep it will be. And stocks theoretically can retrace all the way back to whatever P/E would be fair based on their current EPS. You want to avoid being exposed to stocks with negative EPS numbers during a correction, when people are all crunching the numbers and giving each of their holdings a fresh look. So while the going may be great while the market remains bouyant, and we may be missing some great upside, our approach has always been to buy stocks of companies that are somewhere in the middle... small enough to grow, yet large enough to have a justifiable P/E, and not so large as to be nearing the end of its aggressive earnings growth cycle. It's a tricky balance that requires moving from one stock to the next every 18 to 24 months or so. Perhaps RBCN will be our next VECO... who knows, it sure looks promising!
Joe, congrats if you own RBCN... what a nice move today!
Today was a good day, but not because of RBCN. I don't own it. I've been watching it and holding off for two reasons. (1) Waiting until after earnings. The sharp move upwards may mean that good earnings are already priced in and it may come down hard. I sound like Snot now, don't I? (2) More importantly, there is the possibility of a secondary offering resulting in dilution resulting in a sharp correction. Problem is that RBCN has moved up 25% while I've been watching and waiting. So if it did have a 25% correction, I would be getting in where I started watching it. :( But you have lectured: "Patience, patience, patience," on this blog for a long time. And, uh, Jerry, . . . , try to keep an open mind and don't take what I'm saying too literally. :) And appreciate occasional contrarian voices. They make the world more interesting. For example, this blog would be less interesting without Icon.
FXI
Time to buy into China's growth, Snot, for those who don't want all their eggs in the LED basket? Bank/credit issues subsiding there? The reverse golden cross on the chart nearing the cross over for a golden cross. If you use the 25 instead of the 50, it has already crossed over, but no high volume, so is it too early?
FXI
HAO (small cap) appears to have turned up sooner than FXI.
HAO
Joe, we're keeping an eye on RBCN as well. Patience works with stocks that fall into the midcap/largecap range, but sometimes the small caps will get away from you. We many times watch small caps take off (such as RBCN is doing now) and wish we were on board for the ride. But experience has taught us to choose the more established companies because for every RBCN, there are a dozen stocks that start out great and then just implode. As tempting as the small cap market is, it's better off sticking with stocks of companies that have (or are near to having) four quarters of positive earnings behind them.
RBCN has a market cap of approx 500B. VECO's is approx 2B, and CREE's is approx 8B. So CREE is 4 times the size of VECO, and VECO is 4 times the size of RBCN. If you lay out the top contenders in any given space, investments in the midcap companies offer the best risk/reward ratio, in out experience. Our second choice would be the large caps, as you're less likely to lose big. Our last choice would be the small caps, as the risk increases exponentially with decreasing market cap.
So while the whole idea of being patient for a correction in CREE makes a lot of sense, patience with the small caps is a hit or miss. You will either completely miss a ten bagger or your patience will pay off when the company's accounting irregularities are disclosed and you realize how lucky you were to have avoided it alltogether.
As for FXI, we don't see anything compelling about the chart. It isn't in a clear trend one way or the other. We are looking for the next big thing, but it would be nice if it were a U.S. issue, as investments in China are always dicey.
We always knew the SEC wasn't exactly battling white collar crime, but hadn't heard until now that they're actually in on the whole scam!
http://www.washingtonexaminer.com/local/crime/Former-SEC-lawyer-sentenced-to-eight-years-in-prison-91927889.html
rbcn- someone explain to me whats so hot about this stock besides being grouped with led sector..
revenue estimates for this quarter 10 million no real eps.. i am lost please advise
I think Snot's right about "relative strength", which is part of the reason why I put so much weight on direct rsi analysis. Note my rules said CREE was a buy last week at $75. There is a good chance RBCN could hit $33. I might be tempted to buy some puts if it gets up there. But I'm finding gold to be much more intriguing at the moment. Got a few plays I'm considering, one is a Hecla spread play at $6. Both puts and calls are 30 cents. So Hecla (HL) will need to make an 8% move in the next 10 trading days to make money. I have no doubt it will be making that sort of move shortly, and then some.
Anon,
RBCN is the classic example of a stock in a hot sector that is trading on projected growth estimates which are skewed by the fact that it's just turning profitable. We like the midcaps where growth from year to year is a more stabilized, consistent 20% - 30%, as opposed to the RBCN's of the world where the annualized growth rate is infinity.
Not knocking RBCN, but the reality is that the growth rate looks incredible because it is being compared to last year's numbers, which were negative. When a company goes from making 1 penny per share (or even losing money) to making 20 cents per share, their growth rate is astronomical. It becomes hard to apply any formulas to a company with numbers like this. For the record, RBCN is projected to make approx 20 cents this year and 75 cents next year. This after losing money last year. So you can see how the numbers get astronomical. A stock growing by nearly 400% a year deserves a P/E of approx 500. With an EPS of 20 cents, it would put the stock at $100. With an EPS of 75 cents, perhaps a price tag of $400 is fair. You see how the numbers ramp up? This happened back in the dotcom era, where people erroneously thought the growth justified the numbers. The fact is that when the market corrects, a different calculation is used. People then apply the current EPS and work from there. The projected EPS numbers go by the wayside, as they may never come to fruition if the economy falters. Stocks with a few pennies of earnings (like RBCN currently) get hit very hard during corrections because they don't have the earnings to back up their price.
The stocks everyone thinks are "expensive" like GOOG and AAPL actually fare pretty well, given their $15 to $25 EPS numbers.
Wouldn't you say VECO is in the same class as RBCN? All based on future projections and speculation? I have way too many shares (for a poor man) of VECO right now. I want to sell half at the close, but too afraid I'll miss out on a jump after earnings. We've consistently been up before today, which I'm assuming will be a sell the news reaction.
If VECO does fall after earnings, don't panic sell, because it will quickly come back up like CREE. Don't worry about selling VECO at the moment, find the opportunity to buy more, and sell in 6 months from now.
VECO is a little further along in its growth cycle than RBCN. VECO should have a $2 EPS sometime over the next year, whereas RBCN won't see those numbers for several years. By the time RBCN sees those numbers, the LED craze will be over.
If you have so many shares of VECO that it is causing you anxiety, then sell some. The market should never cause you stress. If it is, you're doing something wrong.
We have no idea where VECO will go after earnings. Our guess is that it will drop a bit and then recover, as you suggest. We think this because CREE did not blow away numbers. They were what was expected, so VECO should follow suit. We may be pleasantly suprised considering VECO has other strong niches and because they sell the machines that make LED's, sales of which should be ahead of the LED market in general, but we're not counting on it. If it drops after earnings, we'll add to it. If it surges, we'll probably sell some... simple as that.
Icon, the majority of traders do not mess with options. If you are going to post your picks here, may I kindly suggest that you do a brief double posting: (1) your options and (2) long or short parallel positions in an equity. Thanks.
VECO is dropping before the close and earnings. Shorts setting up positions or longs taking profits or both? Tick, tick, tick. Here we go.
VECO posted .49 vs analyst expectations of .48
A small earnings beat, similar to CREE... can't complain.
We're glad the stock is not taking off after hours. We'd rather it rise slowly over time than become wild traded. Today's earnings release gives VECO a higher EPS and therefore more legitimacy at its current price. It's less risky to hold VECO now than it was last week. With earnings behind us, VECO will just trade with the broader market for the next 3 months.
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