This Stock Might Light Up Portfolios Once Again in 2013

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apart from lighting up homes, streets, offices and other such places, light-emitting diode (LED) maker Cree (NASDAQ: CREE) has also lit up investors’ eyes this year with a solid return of about 51%. The stock currently trades within 5% of its 52-week high, and analysts are of the opinion that Cree is priced for perfection and there isn’t much upside left.

The stock has seen a few downgrades in the past few weeks from “Buy” to “Hold” (or equivalent), as analysts opine that rising competition in the LED industry could weigh on the stock. Moreover, a trailing P/E of 80 tells us that the stock is expensive, and potential investors could be paying too much for a stock that’s near the upper end of its 52-week range. Hence, in simpler words, not much is expected out of Cree after a terrific 2012.

A Successful Year

Analysts might have said that Cree would face competition in the burgeoning LED industry. But it can’t be ignored that the company witnessed improved order backlog last quarter, despite the forays made by lighting biggies General Electric (NYSE: GE) and Philips Electronics (NYSE: PHG) in LEDs. It is remarkable how a smaller company such as Cree has faced up to these giants by dint of its innovative products. Also, the fact that it’s a pure LED company enables it to focus its energies on a single focal point with precision.

As mentioned earlier, 2012 has been a great year for Cree, with improvements across the board. The company’s revenue, operating cash, and the stock price have swung up along with its order backlog while it has been gradually improving its gross margin by reducing factory costs and producing more efficiently.

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CREE Revenue TTM data by YCharts

Going forward, I won’t be surprised if Cree continues its amazing run since it is plying its trade in an emerging industry. The stock might look expensive, but it has huge growth opportunities ahead which can help it perform even better.

The Opportunity

The company’s growth will be driven by two catalysts -- 1) LED adoption, and 2) Cree’s innovation. As far as the first point is concerned, there’s not much to worry about it as LED lighting adoption is slowly gathering steam. An article in LEDs Magazine tells us how the professional lighting industry in Europe, which is among the largest lighting markets in the world, is gradually shifting to LEDs, thereby providing thrust to LED sales. 

And if we look at LED lighting from a broader perspective, the industry still has room to run if we are to go by a report of IMS Research. LED lighting is expected to double by 2015 according to the research firm, which bodes well for Cree. The eco-friendly nature of LEDs, and phasing out of the 100-watt bulb will eventually lead to greater implementation of LED lights, be it at homes or on the streets.

However, fellow blogger Lee Samaha writes that increasing adoption rates over traditional lighting would prove to be a challenge for Cree. But the company would be aided in this endeavor by home builders and other players in the industry. Moreover, in my opinion, Cree’s cutting edge products which deliver better lighting and higher longevity at low costs could spur customers further into buying them.  

Innovation to Fight Competition

Cree is preparing itself to ride the LED revolution on the back of its innovative products. The company is focused on making its R&D investments count, and is always on the lookout for the next breakthrough in LEDs and lighting. Its products are known for being more efficient, as they produce more lumens per dollar.

Innovative moves are indeed important for Cree if it has to sustain and improve itself in the face of conglomerates such as Philips and GE. Philips hopes to become the numero uno in LED lighting, and has been winning orders across continents for LED deployment. Its Hue LED Lighting System has won plaudits, and products like these have set the bar higher for Cree.

Same goes for GE, which has aggressively expanded its LED light offerings. Moreover, GE’s sheer size could turn out to be an advantage for it since the company enjoys economies of scale and hence, it could produce its LEDs at even lower costs when it ramps up production.

The Takeaway

But Philips and GE haven’t sprung out of the blue in the LED industry and Cree has grown its business despite their presence. Its lights are being used across the world in street lighting and the low cost of its products can bring more customers on board.

Analysts have expressed their concerns about Cree and say that it’s trading at the correct price, but I believe that current investors shouldn’t make hasty decisions and cash out of it since Cree is capable of doing well once again in 2013. 

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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