Should You Follow the Analyst or the Company?

Theoretically, an analyst's job is to analyze and then assess a company, and to give an outlook. However, there is a thin line between the reports of an analyst and guidance from a company when it differs. In the case of Cree (NASDAQ: CREE  ) , we find a clear example.

The Company Or The Analyst?

Cree traded higher on Wednesday by nearly 4% after Piper upgraded the $55 stock to "Overweight" and issued a $70 price target. The firm noted survey data which suggests strong consumer willingness to pay a premium for high-quality LED bulbs – Cree manufacturers and sells LED bulbs – due to them being energy efficient.

In 2013, Cree has skyrocketed higher by 65% due to the excitement surrounding its new LED bulbs, but that optimism was put in check with weaker than expected fiscal fourth quarter sales and guidance, which has caused shares to fall 25% since August 13.

Investors had hoped that LED bulbs would catapult Cree's margins, sales, and lead to higher guidance; LED makes up more than 55% of Cree's total sales. However, the company's 22% revenue growth and its guidance was disappointing, and most of the weak performance was due to both the introduction of cheaper bulbs and also weak demand.

Looking ahead, we have a company whose outlook is not too bright. Then, we also have an analyst who is issuing a more bullish view on the LED market. Strangely, Piper's outlook is just days after Cree announced earnings.

Therefore, I think investors have to honor the company's guidance, trusting that nothing drastic has occurred within the space during the last two weeks to change Cree's outlook.

Pay Attention To Suppliers

Another piece of this puzzle are companies who are connected to the LED market. Rubicon Technology (NASDAQ: RBCN  ) and GT Advanced (NASDAQ: GTAT  ) traded higher by 5.4% and 1.1% respectively behind the analyst's call.

Rubicon is a LED wafer vendor, and has more than doubled in 2013 with the rise in demand for LED lighting. However, the company's total revenue is yet to rise year-over-year, and the majority of gains have been due to speculation.

With Cree's guidance being soft, I'd be careful with this particular stock right now. Rubicon is trading at 52-week highs, and clearly responded to the LED outlook report from Piper. Yet, with Cree's guidance being recent, and it being unlikely that a major demand shift had occurred in the last week, investors might should anticipate a pullback in this small supplier.

GT Advanced is a global equipment supplier in the solar, electronics, and LED industries. In 2013, the $800 million company has rallied 120% behind the optimism surrounding solar and speculation of strong LED growth.

GT's performance on Wednesday wasn't as noteworthy as Rubicon, but that's because GT is mainly a solar company. During its last quarter, $150.7 million of its $168.3 million in revenue was from polysilicon (solar), and only $6.2 million was from sapphire (LED). Therefore, poor performance in LEDs doesn't necessarily hurt GT.

The problem is that investors anticipate strong growth from this segment, along with sapphire use in smartphones. After such large gains, the market might want to see strong performance from this segment to carry the stock higher. Based on Cree's guidance, that fundamental performance might not be present.

Final Thoughts

Beneficiaries of the LED space continue to tick higher, but there seems to be some disconnect between fundamental performance and outlook for the industry. In the case of GT, not much of its current valuation is tied to LED, but for Rubicon and Cree, most of their strong annual gains are linked to high expectations for this space.

Hypothetically, investors believe that the long-term cost-savings associated with Cree's LED bulbs will attract a money cautious consumer, especially with rising electric rates. However, a six-pack of these bulbs can cost between $55 and $75 but may save the consumer $1,800 over a course of 20 years.

Therefore, the question becomes whether or not consumers look far enough into the future and will pay a large price for these bulbs, or would rather pay more over a long period of time? This is a tough question to answer, but with stocks associated with LEDs doubling in the last year, I think investors are taking too much of a one-sided bet. 

The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate and give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2617429, ~/Articles/ArticleHandler.aspx, 9/19/2014 1:49:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement