We've had a great run in the LED stocks recently, and that calls for a fresh look at the numbers to see how they're currently valued, and where they may be headed. Let's put aside the events of the past couple months and focus on the only question that matters now... "Would we buy these stocks if we just discovered them today?"
First, we have to estimate their growth potential and earnings growth timeline. From this standpoint, the LED stocks are still attractive. People have not yet even started to buy these products, and government regulations are soon going to force people to do so... worldwide. This suggests that the LED stocks still have a way to go. But what do the numbers tell us?
Going on the assumption that the actual earnings growth peak for these companies will occur when people first start buying these items in quantity, it suggests that these companies may not hit the top of their growth cycle for another 2 years or so. This means the stocks will hit their peaks in about 15 to 18 months (6 to 9 months before the earnings growth tops out).
Being conservative, the LED companies can be expected to grow approximately 20% to 25% a year over the next 3 to 5 years. This gives them fair P/E's of somewhere between 25 to 30.
VECO
Current EPS= -.22 -.15 + .16 + .41 = .20
Current P/E= 47/.20= 235
EPS in 3 mos= .16 + .41 + .46 + .54 = 1.57
P/E in 3 mos= 47/1.57= 30
CREE
Current EPS= .13 + .18 + .30 + .38 = .99
Current P/E= 77/.99= 78
EPS in 3 mos= .30 + .38 + .43 + .46 = 1.57
P/E in 3 mos= 77/1.57= 49
The above numbers show that while their current EPS's suggest that these stocks are way overvalued, a very different picture will emerge just a few months out. These numbers also suggest that CREE is about 65% more expensive than VECO. This makes sense, seeing as how the 800lb gorilla always attracts the most investors, and therefore carries the highest valuation.
It is our opinion that CREE is overpriced at $77 considering that if it stayed at its current price, it's P/E would be 30 in approx 9 months. That means that it will go sideways for the next 6 months or so before it has room to move higher. Don't believe it? Watch. It may go higher and then drop, or lower and then rally, or just go sideways. Either way, you'll be able to buy CREE at $77 again later this summer or in the Fall. There's no rush to jump in at its current price.
VECO, on the other hand, will have a P/E of 30 in just 3 months if it stays at its current price of $47. We would buy VECO here if we were just discovering it today. Even better if it corrects into the low 40's. The closer we can buy it near a P/E of 30, the better off we'll be in the long run. We're currently looking for an entry point for VECO, and to a lesser extent a re-entry point into CREE.
So where will these stocks top out? There are too many variables involved to give an answer to this question. And truth be told, nobody knows. But from where we stand now, the numbers suggest that at their peak, CREE and VECO could both be trading at approximately $100.
(assuming a P/E of 40 and an EPS of $2.50) It won't be long after their EPS's reach about $2.50 that widespread talk of lower margins, cheaper LED's, expiring patents, newer products, etc, will cause these stocks to put in a top.
If you want to really prepare for the LED craze, we suggest that you get yourselves margin accounts. When these stocks top out, they are going to fall very hard. Any company making products that can easily be duplicated cheaper in Singapore will crash in the end. This isn't a Google where the brand is irreplaceable. This is cut-throat competition for cheaper prices.
When these stocks begin their fall from grace, we will immediately discontinue our love affair with them and reverse course. The LED stocks will be headed to zero like all other stocks. But until then, let's enjoy the ride to $100 by setting up sniper posts and picking off a few shares here and there on those days when people just sell with passion for no reason whatsoever.
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33 comments:
VECO my analysis here:Veeco's valuation is extremely compelling compared to the other leading LED stocks, CREE and more appropriately AIXG. VECO has a PE of 15x (assuming my estimate of $2.90 EPS this year) while CREE trades at 44x and AIXG trades at 29x 2010 earnings estimates. VECO has a price to sales ratio of 2.3x while CREE trades at 9x sales and AIXG trades at 5.6x 2010 sales estimates. VECO has a market cap of just $1.7 billion while CREE trades at $7.5 billion and AIXG trades at $3.6 billion. VECO is going to have a much higher earnings per share this year (I think $3+ is possible) compared to $1.58 for CREE and $1.25 for AIXG on about the same amount of revenues as the other two ($700-800 million in sales)...yet the stock trades for a 57% discount to CREE and a 36% discount to AIXG. If VECO can get a similar valuation to CREE the stock would trade up to $127. If VECO can get a similar valuation as AIXG, the stock would be trading at $84. Let's be conservative and just say $60 is doable for VECO.
CITI ANALYST states this 3 weeks or so ago :F2010 revs/EPS from $680MM/$2.08 to $798MM/$2.86, or about what Street has modeled for 2011 and way higher than ~$2.15 Street models for 2010. More near term, Citi now thinks VECO can guide to ~$0.80 EPS in FQ2:10 (Jun) vs Street models in the ~$0.53 range. This would imply ~$3.20 run-rate EPS vs. current C2010 models of $2.15 -- a gap wide enough, firm would think, to keep momentum investors interested here.
reason why VECO isnt getting valuation as AIXG which it should is it cause it has two other divisions meterology and data storage which aare both profitable too. they should sell those off and become a pure play and this stock goes to a 100
VECO and AIXG are better comparisons they own the whole market for the tools that make the leds. CREE makes leds different sitaution. The more companies that come on board to make leds they have to buy the tools to make them. and AIXG and VECO basically own the market for them..
Snot, when you said "If you want to really prepare for the LED craze, we suggest that you get yourselves margin accounts. When these stocks top out, they are going to fall very hard." Were you recommending going long on margin or were you recommending shorting these names once they top out? Or both?
Thanks for all the good info Snot. If CREE is around $80 before earnings date, do you think there would be small sell off? I think $80 is very possible before earnings.
Thanks.
James
here is your dip in veco over the last 2 days.. opportunity to get in ?
Thanks for all the homework on the numbers, Anon. Wish you weren't an "anon" and instead had a name here because your input is very valuable. We feel the same way about VECO vs CREE & AIXG. Even if VECO is not a pureplay, let's face it, all that matters is its EPS anyway.
Jerry, we meant set up a margin account in order to be able to short them after they top out. There's no need to rush on this. It shouldn't happen for another year or so. We're just reminding everyone that nothing goes up forever.
James, CREE is fully valued. It's price has set the bar very high in terms of expectations for the upcoming quarter. In other words, it's "priced for perfection". Unless it totally blows estimates out of the water, it'll fall after earnings if it's still at $75-$80 a share. This means that even if it beats estimates by a few pennies, it'll correct.
Anon, today's low was a decent entry point into VECO. We missed it, but are still hopeful that we'll get a decent price soon. If not, we already have quite a bit of it.
Snot wrote, "Unless it totally blows estimates out of the water, it'll fall after earnings if it's still at $75-$80 a share. This means that even if it beats estimates by a few pennies, it'll correct." Yep! Remember LDK at $67 or so. It beat by a tiny amount and opened the next day at $55. There was more hype with LDK, so a bigger correction, but yep, that is valid advice for the cautious.
Yes, LDK was priced for perfection. Once a stock is priced for perfection, you have to be very careful. The risk then outweighs the reward.
Over-analysis is fleeting. For all we know the market could trade on expectations of $20 EPS. Think that's impossible? Imagine what would happen if Obooba were to go on tv and (more or less) state that it is "every american's patriotic duty" to replace their incandescent AND flourescent light bulbs with LEDs. What if CREE gets a $10 billion government contract? It could very well happen. All I know is... I love LDK! It might be a stage 4 stock but hot damn....
LDK is just one of many stocks that are grossly underperforming the market at the moment. There's nothing to love about it. Until that changes, there's no reason to consider it.
LDK is easy to trade because it goes nowhere. A Buyer and Holder will pull their hair out waiting for that thing to move. But like you said Snot, it pretty much is a terrible stock.
Thank you for continuing the blog Snot. I appreciate your insight and making me aware of the LED craze. I've been sitting in cash not knowing what to do, waiting for a market correction that never seems to come. Just afraid I came to the party too late. (VECO $45)
sbbuilder- if you have time, can you take a look at this and give me your opinion as to valuation?
http://www.surovell.com/listings/detail.php?lid=45600296&hdoor=y&state_id=&listingcid=0104&fid=9&navn=&aid=010400459&oid=010400003&temp=1088&aname=Heather+Herndon&aimg=1&chome=1&agent_hasfeat=87&&posc=&post=&cfq=&PHPSESSID=l3588urldvn08l5g4b25v4pugg7ii0fk
michigan is a real estate alice and wonderland, my yardstick doesn't work there. thanx, 8888888's
now the million dollar homes are hitting the auction block, how are you holding up in the hamptons snot?-
http://finance.yahoo.com/real-estate/article/109288/foreclosures-hit-rich-and-famous
i've been biding my time watching real estate getting cheaper and cheaper. the stimulus has given a weak artificial boost, now i'm watching for the next wave of foreclosures to hit and drop it another quick 10% or so.
gold is getting ready to run again. i've been a buyer this week. it never fell back to $1000. this should be a sustained run to ~$1500 by years end.
88888's
5x8,
What everyone is wondering, is has the the market bottomed. Depends. The two markets I'm most familiar with are Washtenaw County, and Wexford County (in the NW lower penninsula. Ann Arbor has seen an ever so slight rise. Homes in the 80 to 120 range have been snapped up. There is more movement in the 120 to 180 range now. You sort of sol if you've got something to sell in the mid 200's on up, unless you really want to have a shave and a haircut.
Probably most telling is the number of vacant properties in SE Michigan's most prestigious neighborhoods: Grosse Pointe and Bloomfield Hills. This is old money territory. The well heeled folks are leaving in droves. Our tax base is eroding at an unsustainable rate, leaving communities to scamble to plug the gaps.
Banks are refusing to finance new projects in Wexford County, and in surrounding areas because the finished product will be worth less than the cost to build it. Foreclosed properties are about 90% of all sales. Homes are selling for their SEV's, which typically was about half of market in the good 'ol days.
What does this mean re your query? The house is in very good shape, which is a plus for no other reason than the fact that it wasn't trashed by the outgoing folks (all too common nowadays). Nice outbuildings, mature trees, and, significantly, good acreage. Houses have depreciated far more than land. I'm more interested in vacant land, and have purchased two 40 acre parcels in the last few months. The house is in the middle of nowhere. You'll have to decide for yourself if that's a good thing or not. Is it a good deal? Probably. Five years ago, it was worth north of 300. Check the tax records to find out for sure.
So, in summary, property values in Michigan are a mixed bag. Some areas (very few) are seeing stabilisation, while most are seeing decreased valuation. I have not spoken with a single person who positively sees an end to the troubles endemic in this state. This is a stage four state, below a moving average, ...
Sorry about the name/url thing, but after so long of not posting, I can't remember my password.
Oh, and I sold my shares of CREE this afternoon at 3:40. Thanks for the updated chart Snot. I've been about 2/5 ths invested for the last several months. That amount of exposure seemed appropriate for me. Icon may be right about one thing. This administration has wielded unusual power in private industry. If the 'green' moniker is attached to LED, they could really take off.
VECO should be trading at 60 by now.. sheeesh.. dont get why the streeet isnt running these shares alot higher by now.
Snot, what is your take on earnings season for LEDs and earnings season in general?
earnings season
ABK worth a second look? $10 seems reasonable without bankruptcy.
ABK is a rocket launch. Who made that call? Give us some more. Coulda, shoulda, but didn't.
Your ABK "rocket" just crashed back down to earth.
After coming back to earth, it has refueled and launched once again. What volatility!!!!!!!!!!!!!!
The ABK move is just Goldman/JP Morgan computers run amok playing with options. What they do is probe all the bids and offers, and build up a huge database for each stock. Then the software is able to approximate how much it would cost to raise the price of a stock to any given level. They do the same with all the options. They probe the bids and offers and take that data, along with open interest, and analyze it to determine approximately how much money they could make off options if the underlying stock was moved to a given level. When the two algorithms match, they start accumulating options. Then they come in and buy the underlying, causing it to rocket launch. Then they cash out the options, sell the underlying, and get out with millions in profits. It is nothing more than a sophisticated pump-and-dump.
What makes it work is their ability to see all the bids and offers across the board, and have enough cpu power to analyze them. They are able to calculate how much money it takes to move a stock, based on a summation of all the orders currently outstanding. They KNOW if you have a GTC order out there to sell 1000 shares of CREE at $86. They KNOW if you have a GTC buy order for $68. They know every single order outstanding. Combine that with average daily volumes, stop loss targets, distribution schedules, even their own client activity (!).
I would not be surprised if they trade this information with competitor brokers, and then collude to split the profits from their manipulations.
ABK, AIG, FRE, FNM, C. They love to play with those stocks especially, because they trade millions of shares but in reality the real dollar volume for these stocks (total volume minus their HFT computer volume) is actually very low. They seem like very liquid stocks, but at the flip of a switch they can make them illiquid and whip the price around like a rag doll. And then flip a switch again and make them seem totally liquid. The computer tells them when to do it based on the profit potential.
As I have said before, I can practically see these computers working when I look at an rsi chart.
This feeding frenzy will continue until these banks mop up all the money that has been printed out of thin air. Then the market will crash and they will be hungry for more. And they will surely get it. While another 20 million jobs are lost.
You can "practically see these computers working when" you "look at an rsi chart." Ha. What a laugh! What are you smoking? All you see on an rsi chart is a spiderweb of your own invention. Your charting is voo-doo charting. If GS was really controlling so much of the market the way you conspiracy theorists believe, how come it hasn't gone up more? Don't you think the major news regarding ABK has a little something to do with its action for the past week?
http://finance.yahoo.com/q/ta?t=1y&s=GS&l=on&z=m&q=l&c=&c=^GSPC
Funny how you can never see any of this before the fact. Always after. Always late. Why don't you call the top again for the millionth time? Maybe someday you'll finally be right.
Here is an article which points out the truth of Icon's discourse. Everybody already knew this sort of thing. What this article does say is that GS and another investment bank or two are the only sort of game in town and that they are controlling and manipulating the whole market. But then one would have to go to Icon's blog from years ago to try to understand the mind of a conspiracy theorist.
http://finance.yahoo.com/tech-ticker/another-reason-most-day-traders-are-deluding-themselves-468739.html?tickers=dia,spy,qqqq,^dji,^gspc,^ixic&sec=topStories&pos=9&asset=&ccode=
Whoa baby! Hey, Icon. How about that GS control on the whole market. I guess the SEC has something to say about that, huh?
Funny how I can never see any of this before the fact? Smoke what? I see it all the time. See my trades for the past 24 hours.
http://grab.by/3NTc
A clean double on a bet against the real estate ETF. (I caught the split too, which is why the option symbol changed.) And a 6 bagger on the XLF puts, which I havent sold but will be selling very shortly. I'm trying to get 80 cents.
What a laugh, Icon. You are a great entertainer. Here is your call: "This feeding frenzy will continue until these banks mop up all the money that has been printed out of thin air. Then the market will crash and they will be hungry for more. And they will surely get it." You didn't see the SEC knocking down the doors of GS and GS dropping like a rock and taking the whole market with it. You called exactly the opposite. Not long ago you made a guarantee that the market would be more than 5% below where it was in 6 weeks. It wasn't anywhere close. What a guy you are, Icon.
SEC is hardly "knocking down the door" of GS. If you think problems are solved that easily, you have a lot to learn. The fight against the banks will be a long grinding, grueling contest, and I doubt many people have the resolve to actually take them on. What happened last week (both in the news and in the stock market) was a drop in the bucket. There is every possibility that Goldman will skate away with no more than a slap on the wrist.
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