Thus far, 2014 has been a year to forget for Cree (CREE) bulls.
The stock started the year trading in the $60s and may now struggle to get back into the mid-$30s again until some good news comes its way. CREE disappointed in mid-August, then again with a warning to start October and more disappointing guidance last night.
Though management attempted to put a positive spin on the future, the LED segment of the business is troubled. The one positive is the valuation may start to bring in some longer-term investors. The company has no debt and roughly $10 per share in cash, so the price-to-earnings ratio of net of cash isn't pricey, and the stock will look cheap if the LED business does innovate and turn around, as management believes it will. But that's a big "if."
While I'd like to deliver great news for CREE, I'm not sure I can do that just yet. History is not on the stock's side--well, at least for this week. If you missed the trade pre-earnings to the downside, you may have one more opportunity. Over the past two years, shorting or buying in-the-money puts on CREE at the end of the day post-earnings has turned a profit in seven of the last eight reports, including the last six reports in a row. While two of the drops at 5% and 8% were the biggest drops, a more moderate 2% would be my expectations.
CREE does have a rather large short interest, around 11.5%, so getting a borrow could be challenging, and the cost could be prohibitive for some. The one week CREE did close higher, it was up 3% and the stock did close higher the day after earnings, so it does provide one reference point for risk. Unfortunately, it is only a single point.
One other point worth noting: The size of the decline the day immediately after earnings had little influence on the size of the decline for the rest of the week.
I'm looking at a play toward the end of the day. I find the post-earnings trades come with a much more reserved risk-reward strategy, with the additional information already released.