Recognized Risk and The GG

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By MDawgX
March 15, 2002

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A quick hey to everyone on this probably won't recognize me; if there was a most active lurker list, though, I'd probably make it.

Cree is my favorite company, and CREE is my favorite stock. My infatuation has resulted in a two-inch compilation of notes and reading material on just Cree. I have a section for news and notes; a section on Nakamura; a section on SiC, its creation and its benefits; and I have a section on issues with its potential applications. Sometimes it's the 2nd biggest holding in my portfolio; sometimes it's the 7th. I love you, CREE, and I hate you.

I know this is a frustrating time for all the Cree shareholders out there, what with CREE taking a nosedive into a triple dip over the past couple of years. Now maybe I have no right to say this, having been in the game for a mere double dip, but I think we're losing a little perspective on this board.

Information Risk

The first issue that I think should be recognized is that each one of us has a different CREE story. Each and every one of us took a different risk in taking CREE in. Our stories differ based on a plethora of factors: information, investing strategy, name it.

This is to be expected. Cree is a complicated company with a difficult material. It would appear to have four key franchise areas: Microwave and RF devices, LED related issues, SiC Substrates and Epitaxy, and Power Semiconductors. I say appear, cuz it's hard for me to understand. I never paid much attention in high school chemistry, but I think it's a fair assumption that our level of understanding of SiC will change with our familiarity -- a familiarity that many of us will not have. The nature of SiC and your knowledge of it is, therefore, a factor in the risk you take.

What makes Cree even more complex is that, while it monopolizes the SiC portion of its existence, there is a competitor for each and every niche it attempts to conquer. Blue lasers? Nichia, Sony...RF?'s perplexing, but it's economics. I hear complaints of commoditization, and ASP declines; personally, I thought this was the selling strategy -- to make CREE's products more openly accepted and used.

Even more baffling is the blue laser: I hear people complaining that the DVD Blue Laser application standard was nixed, yet I still hear comments on how the DVD Blue Laser will be slow in acceptance. So which is it? Is it no DVD or slow DVD? The fact that CREE watchers can't even agree on the actual (no DVD) or potential (slow DVD) risk shows the difficulty in tech investing. It's not like walking down to the local Quick Stop to see if they are still selling Coke.

The Gorilla Game and Point-of-Purchase

While the available information and the individual's perception and understanding tell a story, the time of purchase tells an even bigger one: the risk you took in investing in CREE differs on the time at which you purchased it. Don't get me wrong here -- this isn't TA or market-timing gospel. I'm just trying to put the events of the past few years into context.

My own express opinion of the 1999 - early 2001 era? Gorilla Game bubble. You hear the words tech bubble, or Internet bubble, or similar phrases to those effects. The Internet bubble may fit the Internet, but I think that the tech bubble was a separate animal entirely.

I've read The Gorilla Game, as I'm sure most of you have. Personally, I think it's a great book that helps to put technology companies into perspective for those who have none (such as myself). However, I do have an issue with the investing strategy.

At the heart of it, it's a sound strategy: buy all the best stocks in an industry, neglecting valuation, until you have a clear leader, then sell the losers and pile on the winner. That way, you can both participate in a high-growth movement and still adhere to your long-term buy-and-hold principles. The problem wasn't just that you told people that valuation isn't important. The problem is that you told people that valuation isn't important and everybody listened.

Some might say that the issue with an investment strategy is when everyone knows it -- that is, everyone follows the same strategy, bidding up the same stocks in the process while disallowing a decent purchase price. Some might even say that that was the case with the Rule Maker Portfolio...but I'll disagree.

The problem occurs not when everybody follows the same strategy, but when everybody follows the same strategy and you tell them that valuation is not important and they all agree. I submit that with Rule Breaker investing it's hard to put a value on companies with little or no earnings but explosive prospects. However, it is always in your best interest to decide where the possible future valuations may lie, and then decide if the price you pay and the risk you are taking are reasonable in relation to each other.

My intention is not to knock those people who bought CREE during the last few years; my contention is that if you bought CREE during the '99-early '01 period, you were at the mercy of Gorilla Game risk, the fallout of which has proven disastrous.


We're investing. That's the bottom line. CREE's at a sub-$1 billion market cap for the fourth time in a year. What's the worst that could happen in five years? CREE derives all of its revenues from LEDs? Ultra RF down the drain? No blue laser? No power devices? Minus the cash, CREE has an enterprise value of around 3/4 of a billion dollars.

I'm not going to say that CREE is a no-risk proposition. It's having operational problems, it's having economy-related problems...but at $14 a share I'd say that the company (story, if you don't believe in the company) is intact and available at a more-than-acceptable risk for the potential reward. I feel as if the market is playing short-term games -- as if we can buy the LED business and get all the potential thrown in for free. Wouldn't you be a buyer at this price? If you would, then it wouldn't make a whole lot of sense to sell it, unless you're taking a tax loss or have a better proposition for your dollars.

CREE expert? Not me. Look at SEA99. SiC and other material related expert? Not me. Try CarboRunder. Investment expert? Of course not, and you don't need one. I'm just trying to put things into perspective. I'm a CREE shareholder, and I want a better reason to sell.


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