Earnings Recap Cheat Sheet: CREE is a Momentum Stock Gone Wrong

Earnings: Q4 profits of $0.55 vs. consensus $0.51 and $0.18 in Q4 last year.

Revenue: Up 79% to $264.6 million vs. prior guidance of $255-$265 million.
“Fiscal 2010 was a great year for Cree and the LED lighting revolution,” stated Chuck Swoboda, Cree Chairman and CEO.  “We made good progress building momentum in our business and delivering on our four key objectives for the fiscal year.  Entering fiscal 2011, we are focused on extending our leadership position while we build the scale, cost structure and channels to win in the market.”

Comment: Seeing shares sell off following a better-than-expected number is about the most dismal sight that a holder of a stock can behold.  If you own shares of Cree Inc. (NASDAQ: CREE), well, you’re feeling it pretty hard right now.  After beating on EPS, hitting the upper-end of guidance, and registering gross margins that widened to 49.5% from 39.6%, shares of CREE are down more than 8% in after-hours trading on top of a near 4% loss during the day.  For a stock that opened up the day at $71, we may well see a test of $60 sometime tomorrow.

The selloff is a result of the mixed guidance the company issued on the call.  CREE projected FQ1 EPS of $0.56-$0.59 on revenue of $270 million-$280 million.  Consensus estimates sought $0.54 and $284 million, respectively.

Last week, CREE came under pressure after a Taiwan-based newspaper reported that LED makers were cutting orders.  CREE took a 5% hit on the news. Taking note, we here at the Cheat Sheet recommended in our CREE earnings preview that you should “wait for the news to come out so you can properly appreciate whether or not the LED market is rolling over…if you currently own shares, picking up some protection would probably be ideal.”  As always, we had your back.

Going forward, you’re probably best off staying away from CREE until we see some stabilization.  When these momentum stocks get hit they can really take a ride, and that’s not something you want to be caught standing in front of.

From a technical standpoint, shares closed up after-hours trading almost precisely at their 200-day moving average.  If CREE can get through the morning without piercing that level, that would definitely be a bullish sign.  Still, if you’re the type that thinks we’re going to see a lot of negative tape going forward, you’re probably best off looking elsewhere, as the state of the LED market remains somewhat unknown.

Disclosure: No holdings in CREE.