Cree (CREE) has posted two consecutive negative earnings surprises and has seen earnings estimates slide. The stock has a Zacks Rank #5 (Strong Sell) and is today's Bear of the Day.
From Bull to Bear
Just three short months ago, the prospects for CREE were much better. In fact the stock was a Zacks Rank #1 (Strong Buy) and was highlighted as the Bull of the day on July 16.
This was before the company posted two negative earnings surprises. Each miss was $0.02 in dollar terms and approximately -6% below the Zacks Consensus Estimate.
Cree makes lighting-class light emitting diode (:LED), lighting, and semiconductor products for power and radio- frequency (RF) applications. Cree was founded in 1987 and is headquartered in Durham, North Carolina.
Estimates Moving Lower
The company had a lot of earnings momentum heading into the summer. In February of 2012, the Zacks Consensus Estimate for 2013 stood at $1.37 and then bounced higher to $1.50 in March. The consensus kept rising and reached a peak of $1.59 in July. Then came the first of two earnings misses.
August saw the Zacks Consensus Estimate slide from the peak the previous month to $1.44. Two months later, estimates had again slipped to $1.32. That round trip move isn't quite lights out, but prospects have clearly dimmed.
A company that has missed two straight earnings releases usually has a lower valuation than CREE. The trailing PE multiple of 57x is more than double the 21x industry average as is the forward multiple of 46x when compared to the 19x industry average. That sort of premium is usually reserved for companies that BEAT estimates, not miss them. Price to book is in line with the industry average, but on a price to sales metric, the company again is trading at 2x the industry average.
So why the big premium? Well CREE is slated to grow revenues at a rate of 16% next year and that compares very favorably with the 3.2% industry average. Earnings growth is slated to be even more impressive with a 48% improvement in earnings vs. a 28% gain for the industry average.
The Dreaded Double Top
I try to avoid most of the technical side of investing. Mostly I don't do it because I am bad at it, but I do know a few things. A double top for CREE is a technical term that suggests that the stock tried to reach new higher highs, but was denied. Technical analysts would say such a formation is a negative.
Investors might want to look at other stocks in the same sector with a better Zacks Rank. One example of that is Greatbatch (GB) which is a Zacks Rank #2 (Buy).
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.
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