Click chart to enlarge(This post has been updated to reflect VECO's latest guidance)
Time to re-evaluate VECO. The chart shows that it is either well above the top of its channel, or it has simply started a new channel. This is an arithmetic chart, so "going parabolic" is not unusual for the strongest growth stocks. It's when a stock goes parabolic on a logarithmic chart that you need to run for the hills. Going solely by the channel and moving average, VECO is overbought and ripe for a correction. It is only an immediate cause for concern if its fundamentals tell us the same thing, so let's take a fresh look at them...
Over the past four quarters, VECO has posted earnings of
-.15, .16, .41 & .49, for a current EPS of 91 cents. Next quarter, VECO projects to report earnings of 78 to 90 cents per share, well above the 59 cents previously expected by analysts. For the purpose of our calculations, we're going to assume VECO will report 85 cents per share next quarter.
No one really knows how well the LED companies will do, as the number of lightbulbs in the world is an incalculable figure. History has proven, though, that during their most aggressive growth phase, companies grow by approximately 20% to 30% annually for about 5 years at a time. Beyond that, growth at that rate is unsustainable. We therefore typically use 25% as our estimate for a company's EPS growth, so as not to get caught up in a Dutch Tulip bubble.
This number should be scaled up or down depending on the size of the company. For a company VECO's size, an estimate of 25% to 30% is acceptable. As an example, we might use 20% to 25% for a company the size of CREE, and 15% to 20% for a company the size of AAPL.
This estimate yields a P/E for VECO of 30 to 36, using a PEG ratio of 1.2. As we've said before, Buffett supports the use of a PEG ratio of 1.2, so who are we to play with that number?
Using VECO's current EPS, it should be trading anywhere between $27 and $33. If we had a broad market correction right now, this may be where VECO would retrace to. And it would be a steal at that. But who goes by current EPS figures?
Looking out 3 months, VECO's projected EPS ($1.91) suggests it will be worth anywhere from $57 to $69. Even if we go with a more conservative growth rate like 20%, we'd be looking for VECO to be priced at around $48. So we don't feel that there is a lot of downside in holding VECO here, despite how "nosebleed" the chart appears.
Looking out two quarters, the 15 cent quarter will be replaced perhaps by another 85 cent quarter, giving VECO an EPS of $2.61. At that time, VECO could be trading at around $80 per share.... maybe even higher if the market is surging at that time.
Our approach going forward is going to be to hold VECO and add on dips. Of course there is a number at which we would sell, but as long as it stays below $60 or so, we won't even be considering it.
In another note, we continue to believe that the market is blowing off and about to retrace significantly enough to give us good entry points on just about every issue.
23 comments:
Somebody just snapped up 52,900 shares. I upped my portfolio percentage of VECO to 2/5ths about ten days ago. The idea was that if there was a significant move up, I could sell a portion and retain a core holding. It looks like I may sell a portion soon, and return my portfolio to a more balanced one. Thanks for the spot-on blow by blow, Snot.
what was in the broken link?
sb, feels like we're on the brink of a broad market correction... just a gut feeling (and top of S-curve). If it happens, we're just going to use it as an opportunity to see which LED stocks are most resistant to decline and back the truck up.
Anon, not sure why the link doesn't work anymore, but it said that VECO projected an EPS for next quarter of between 78 and 90 cents. Analysts were expecting 59 cents. If VECO is giving us good guidance, these numbers change the math we did in the original post.
AIXG has not run up as much as CREE & VECO, in part due to currency issues with the Euro, thank you very much Zorba. Not! If it holds up better in a correction, will you go back into it?
How is this for a 6 month chart where a stock has gone through all 4 stages?
MON
We'd consider AIXG again if it holds up well if the market corrects. For that matter, we'd consider any stock with high relative strength when the market corrects.
Some stocks make new highs during corrections. Those are the bets ones to own when the market recovers.
As for MON, we typically look at the stages as longer term events, even though they show up in shorter time frames. Our take on MON is that it was in a Stage 2 from 2003 to 2008, then in a Stage 3 for the first 3 quarters of 2008, then began a Stage 4 decline in Sept of 2008 and has been in Stage 4 ever since. The little rallies it's had since breaking down in Sept 2008 are just bear traps in a much larger decline. It now looks as if it wouldn't take much for it to break down into a whole new, lower trading range.
Impossible to tell just yet, but it looks like the market may have started another healthy 10% correction today.
VECO and RBCN are today's leaders as far as resisting the selloff is concerned. If the selloff continues, of course they will be included in the massacre.
It's tempting to buy some DXD or SDS as a hedge, but we're just going to ride it out and look for buying opportunities.
If anyone is looking for a short, our public short candidate is SPWRA. It is at all time lows. The chart of SPWRA is what a chart of your short positions should always look like. A great paired trade would be long VECO, short SPWRA. That would take advantage of the market correction by putting your money long in a stock with high relative strength and short in a stock with low relative strength. If all goes according to plan, you would profit from both positions regardless of the direction of the broader market.
The FED is making an announcement at 2:15pm today, and while they are expected to keep interest rates steady to support continued growth, we feel that their announcement may not be so benign.
Given the tear that the stock market has been on lately, there is a chance that they include some jargon aimed at cooling it down a bit. Remind you of Greenspan? That guy spent his career trying to cool the market down.
We don't think that the FED minds the market trading at 11,000, but we feel that they don't want it going to 13,000 anytime soon. It's too much too soon, and the economy can't support it yet. If we are correct that their words are more cautious than they've been after their last several meetings, this will be another case of which came first... the market's moves or the "news"? Should be an interesting day. We're either on the brink of a broad market correction, or we're immune to Europe's woes. If we do experience a market downturn, does anyone want to guess at what it will be dubbed by the media?
Certainly not the "Asian Contagion", but perhaps the "European Latrene", the "Greco Wrecko" or the "Euro Heave-Ho"?
Perhaps we can start an Ultra ETF where people can place such bets.
It seems like the market will most likely correct, wouldn't you say it's better to sell now and buy back later?
How many days do you typically take to measure relative strength in a situation like this? VECO and RBCN were stronger yesterday, but today it is RBCN and CREE, thus far. Also, in light of Icon's thoughts on the RSI, would you comment on how the RSI chart ought to be used in your style of investing? Thanks for any thoughts you care to share.
what do you think the passing of the financial reform bill will do to the market? will it use this as extra fuel to correct?
I concur with the assessment of SPWRA. It's really breaking down. But note that CREE is generating a somewhat similar technical pattern. Because CREE has more relative strength, it is not likely to suffer the same % decline as SPWRA. But the patterns are not exactly the same. CREE broke a downtrending rsi support line, which is extremely bearish even for a strong sector. If CREE does not hold that support today, I would be getting as far away from LEDs as I could right now.
Icon, in the following article link, using the RSI chart to determine if an equity is overbought or oversold is explained. Also, the article explain bullish and bearish divergencies and how they can, at times, give a buy or sell signal. What I do not see in anything I have read about RSI charting is where one draws resistance and support lines off of every little blip on the chart and extrapolates them out into the future and formulates buy and sell signals on that basis. Do you know of anyone else who does RSI charting like you do?
RSI article
Sure.
Tom Aspray @ MoneyShow.com.
Marty Chenard @ StockTiming.com.
shankystechblog.blogspot.com
stocktradersbulletin.com
mytraderscorner.com
And some others. But to my knowledge, none of them have crafted a set of rules to follow as I have. But many of them use the same general concept. Let's just say we are all playing in the same ballpark, if not the same game.
Cliff,
Did you just throw out a bunch of web addresses thinking no one would check them out?
mytraderscorner.com- most recent post is October 2008.
stocktradersbulletin.com- most recent post is November 2009.
Stocktiming.com is a pay site, so no way to confirm.
MoneyShow.com- when you do a search for Tom Aspray nothing comes up but his bio, so again no way to confirm.
shankystechblogspot.com- a fellow consipracy theorist of yours who doesn't use quite as ridiculous spiderweb charts as you do, but he's close.
So you got one out of five- just like the accuracy of your "calls"!! LOLOL
Googling "deadly divergences" will take you right to an article by Aspray. But dont read it! It might be a conspiracy theory!
Icon, thank you for the link. Aspray is drawing bullish and bearish divergences very much like the article for which I provided a link. To the extent that you are doing that, your analysis is fundamentally sound. On some of your charts, though, you seem to think that you can predict a future price at which a stock will break down or soar on the basis of your drawing numerous lines off blips on the chart and extrapolating them out a week or more. When the RSI chart is adjusted just slightly for factors like how many months are displayed, I have found that the lines are significantly different, giving very different results to your predictions. Once I even tried to reproduce your chart with the same time frame you used, and the lines were radically different on my stockcharts.com chart. If you were doing nothing more than noting, e.g., that the RSI chart was making lower highs while the price chart was making higher highs, thus, the equity might be about to hit a temporary top, so sell 1/2 of your holdings just in case, then I would not call your analysis spiderweb charting. Your method works for you, though, so thanks for sharing the links.
Snot, is VECO breaking down or is this just profit taking? How much is AIXG's retrace due to Euro problems? If it is, if and when the dust settles on European debt issues, when would AIXG be a buy again?
Icon, bullish divergence for POT? Does it give you a nostalgic feeling?
POT
Interesting move for VECO today, would like to hear some analysis on this one. Seems like the market is taking the Greece issue and going higher with it. Everyone is talking about a correction, will it happen soon or DOW 11500 is the time?
Our take on VECO is that it's just another sell the news kind of thing. The way that works is that people think VECO has done its thing for the time being and it won't be doing much for another few months, so they'd rather keep their money working for them elsewhere. These are the shorter term traders, opportunists that they are. The longer term investors like us don't frankly care what it does for the next three months. We only care what it does by 2011.
Is LED dead? Of course not! It's only just beginning! Where we are similar to the short term momo traders is that like them, we are looking for dips upon which to add. We'd like to buy when the broader market corrects, because that's when you get the real whiplash moves that give you great intraday prices. But we've got three months to find our next entry point, so there's no rush. Patience.
AIXG is down 10% at present. They released a quarterly report earlier today. Summaries of it have not really hit the financial web sites. They had significant growth quarter over quarter and year over year and raised guidance. An English version of it is available on their web site.
http://www.aixtron.com/index.php?id=524&L=1
Since I started trading options I focus less on trying to predict exactly where a stock is going to go. In fact when the profit potential is greatest is when I really dont have any insight at all which direction a stock is heading. For example, look at today's chart of CREE. I have no clue which direction it is going to break. I only know it IS going to break hard one way or another. So I would execute a spread play with $85 calls and $65 puts. For a combined price of $1.30 a contract, it is a no brainer because in a few days, one of those contracts is going to be worth $2, minimum. If I didn't have other plays I think are better I would go for that.
Who cares Cliff??
At least you finally admitted that you have no clue. We knew that all along.
Post a Comment