Click chart to enlarge We sold all of our shares of CREE this morning, after a UBS upgrade put the stock up 7 points. We have nothing against CREE, and will likely repurchase it at some point in the near future. We just feel overexposed at the moment to stocks that are trading at or above the tops of their channels, well above their moving averages. The chart of VECO above illustrates this.
We chose to sell CREE rather than VECO today because VECO offers better value at the moment. Both companies are expected to report approximately $2.00 or better by the end of 2010. With similar EPS forecasts, we'll take VECO in the 40's over CREE in the 70's.
VECO announced that it will be releasing earnings on Monday, April 26th. If the stock surges prior to earnings, we may be selling it as well.
We feel that the broader market is not ready to run out of steam just yet. One of two scenarios will likely happen. In the first scenario, the market will continue its climb to about 11,600 or so. Then it will correct about 10% sometime this summer. In the second scenario, the market will continue to climb to about 12,500 or so, then experience a 15% to 20% correction sometime in the Fall (perhaps October). In either scenario, these LED stocks could easily remain bouyant for the next several months, possibly putting in some very impressive highs (CREE at $100 and VECO at $80?). We plan on being on board for the ride, but are also very well aware that at some point between now and October, people are going to remember that the reality of the current economy is in no way suggestive of anything more than Dow 12,000. The upside is limited from here for the broader market, and any fluff will quickly evaporate. Although we aren't looking to get back to 100% cash just yet, we are going to be more conservative going forward considering these stocks have already posted some very impressive gains. Our sale of CREE today marks a transition in our investing mindset from one of "everything's peachy, buy and hold" to "sell into strength, don't be caught overexposed".
8 comments:
I agree with VECO being the better value than CREE. What type of pullback in CREE are you targeting before re-entry? How likey is it that CREE gets to $3 eps this year?
Bob, we don't have a price target for re-entry, but rather would like to buy the stock at a more reasonable place in its channel.
Usually if you sell when a stock is above the top of its channel, it buys you enough time to wait and see. If the stock just goes sideways for a month, we may just re-enter it then, at the center of the channel.
CREE could hit $3 EPS this year, but we don't think it's that likely. The trajectory of its past earnings don't suggest that will happen so quickly. Even at that it would just have the same valuation as VECO. People buying these stocks are not buying them for what they'll report over the next several quarters, but for what they'll report when people actually start buying these LED bulbs. That may still be 18 to 24 months out.
Snot, here's an article saying high oil prices were the chief catalyst for the 2008 recession.
link to article
Joe, thanks for the link. Surely a website titled Oil-Prices.net isn't biased:) Kidding. We believe that the surge in oil prices was what pushed the market over the edge as well. Surely it was a combination of factors, but none of them did more psychological damage than having to spend $70 to fill the tank. Somehow when people see the cash in their wallet or purse disappearing at record speed, it has more of an impact on their spending habits than a change to their finances on paper.
We are neither Democrat nor Republican. We like certain Democrats and certain Republicans, and feel that every person deserves a fair try regardless of political party. That said, we feel that Bush was a major contributor in the fall of the economy, putting his own friends interests above that of his country's. For a short time, he created an enormous economic boom for Texas, but just look at what it cost the rest of us. Obama has not, that we're aware of, done anything to materially alter the price of oil. We're not keen on some aspects of his health care plan, but we understand that we're only in the bottom of the first inning.
A question, Snot. If the market does correct as you suggest, either this summer (10%) or this fall (15% to 20%), will you buy back CREE, et. al., if they break through the bottom of their channel in that correction? Fertilizers were the last to give in back in August of 2008 and when they broke through the channel bottom, you declared, "Abandon ship!" I had abandoned my MOO two or three days prior during the POT conference call, if I remember correctly. Your call was a good one as POT went from $200 to double digits in a very short time. On what basis will you decide to buy back into CREE or decide to stay away if we have your predicted correction?
POT
Joe, during market corrections is the single best time to gauge the relative strength of a stock. A strong stock will not break the bottom of the channel during a normal, healthy 10% correction. In fact, if it starts out near the bottom of the correction, it can wind up higher than where it started when the market hits bottom. Strong stocks are hard to buy for that reason. If the market corrects more than 10%, then we'll just have to see how resilient these stocks really are. We'll buy back in if they show strength relative to what the market is doing. We would absolutely buy CREE back on a market correction if it showed signs of resiliency. In fact, we're not waiting for a correction in order to repurchase the shares. If we get a decent entry point (just some fluke), we'll jump back in, although maybe not with 20% of our portfolio at first.
Snot
This is confusing. You sell one stock, and as a partial justification, you post the chart of another. How about a current chart for CREE? Also, you mentioned buying back if a stock goes sideways for a month. That is precisely what CREE has done. I didn't sell yesterday, and probably won't in the foreseable future unless it starts to move below the center of the channel. Also, I can always purchase additional shares if it does go down appreciably.
sb, we're not advocating that everyone sell their shares in CREE. If CREE was all we had, we would have kept them. You just have to understand that a 66% exposure to two stocks in the same sector gets dangerous as those stocks get higher in their channels. CREE did go sideways for about a month, moving from the top of its channel to the middle of its channel in the process. But yesterday's 7 point jump put it above the top of the channel, much like VECO. We'll post a chart of CREE later today, but it's basically the same idea as that of VECO. We only posted VECO's instead because we're focused on that stock now. CREE is in our past unless/until it moves a bit closer to its moving average. Our "nondiversification" approach to investing has its merits, but you can't practice it and be greedy at the same time. It can backfire on you. Our current +/-33% exposure to the sector is enough considering the run these stocks have just had.
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