This time of year has historically been dim for stocks; however, semiconductor company Cree (NASDAQ:CREE) has shone brightly. The stock has tacked on a gain of 16% in September and outperformed the Nasdaq by more than 40% since late July. What is driving Cree higher?

There are several Foolish answers to this question. First, let's examine the company's strongest product line. Cree develops and manufactures light-emitting diodes, commonly called LEDs, which are basically tiny lightbulbs that fit into an electrical circuit. (I will save the technical discussion on what a diode is for another time.) Think of an LED as an incandescent bulb, but without a filament. Because LEDs use low voltage, they can be used in many applications that need a low-power, low-light source. Examples are digital clocks, automobile dashboards, and mobile-phone handsets. In fiscal 2004, LEDs accounted for 86% of Cree's sales.

Now let's see how these sales are helping the stock price.

Last quarter's numbers were quite impressive. Total revenues increased 42% to $90.9 million, while net income jumped 84% to $20.9 million. The earnings per share of $0.28 were nearly double that from the same quarter a year ago. Those robust revenues reflect strong demand for LEDs used in the handset market. The upside guidance from Nokia (NYSE:NOK) -- which sells twice as many phones as rival Motorola (NYSE:MOT) -- on rising sales of handsets gives Cree another reason to smile.

The math is simple. The strong market for handsets equals strong sales for LEDs, which account for about half of Cree's revenues. The good numbers have caught the attention of investors; thus the stock has been rewarded. The next earnings report is due out mid-October, and I doubt the numbers will disappoint shareholders.

Another advantage for Cree is its long list of intellectual property consisting of more than 200 owned or licensed patents. This gives the company an edge over its competitors. Combine that with $253 million in cash and marketable securities plus no outstanding debt, and you have a very Foolish reason for the stock's bullish performance.

What's next for Cree? How about a new, more powerful LED it calls the XLamp. The high-power LED is an alternative to conventional lighting used in homes and businesses. Anticipating strong demand for the XLamp, the company has announced a $300 million plant expansion in North Carolina. In the longer term, Cree is developing microwave products that it thinks could be used in next-generation wireless communication devices.

Cree has a plan for success by expanding markets and developing new technologies. The race to replace the traditional lightbulb has begun. Thomas A. Edison would have been impressed.

For additional enlightened reading, check out Bright Times for Cree and On Cree's Buyback.

Fool contributor Kelvin Taylor has a few bright ideas but does not own shares of any of the companies mentioned.