Trade Alert: Lights, camera, action

Revolution Investing is a two-fold concept that covers both “cyclical” and “secular” trends. It entails trying to navigate the broader macroeconomic and geopolitical trends and cycles that increasingly dominate our economy and markets. This is how we navigate the “cyclical” realities that we all have to deal in, which in many ways is a defensive concept of trying to protect our assets and wealth.

Revolution Investing also entails finding tech trends and/or companies that are truly Revolutionizing or creating an huge market and industry. This is more of an offensive concept, where we get our biggest gains and profits.

A great example of a tech trend that created entirely new marketplace would be the PC industry, which created an entirely new huge marketplace when it hit mainstream in the 1980s and which grew at triple and then double digits every year for the next two decades.

And you can go back to my work from 2006 and 2007 when the “smartphone” was just about to Revolutionize the entire wireless phone market – which itself had Revolutionized the traditional wireline phone industry – for more on that concept and why we were so well positioned in Apple and Google when their stocks were a small fraction of today’s prices.

All of which segues us perfectly to our topic here today — LED lights. The lighting/lightbulb/lights industry was a huge secular growing industry back in the late 1800s and for even most of the first half of the 20th century. But as the developed world lit its way out of the industrial age, sales of lightbulbs became rather cyclical. When the economy boomed, demand for more lightbulbs in cars, houses, stadiums, streets, etc, increased. And vice versa. So by the end of the 20th century lighting, along with most other industrial markets, were just about reflective of the broader economic cycles.

But in today’s lighting marketplace, LED lighting is secularly growing within the broader lighting industry. LED is taking huge market share already. Even better, the bang for the buck is just now crossing a threshold where LED lighting gives you more and more lumens per dollar spent than the older bulb technologies. This is much like the flash storage industry taking huge market share as its price per bit drops below that of hard drive storage within the broader data storage marketplace which is rather cyclical at this point.

So let’s look at the world leader in LED lighting, CREE, which is a company we’ve owned in the past and is looking like its set up for a nice long-term return here. Using our standard Revolution Investing balance sheet and valuation metric, we come up with a fundamental break down for CREE that looks something like this:

So, we’re looking at a company that’s growing its topline 20% plus annually and its earnings even faster as margins expand overtime as costs drop faster than selling prices. CREE’s got nearly a billion net cash on the balance sheet with no debt to speak of and should earn nearly $2 a share this year, giving us a price to enterprise value multiple of about 25 right now. The company will likely earn closer to $5 a share annually by 2020 or earlier. I like a secularly growing company (that might very well be a take out target by an industrial conglomerate like GE or Honeywell some day) when we can get it on a huge sell off as we can here with CREE. The company missed estimates and guided slightly under analyst consensus estimates for next quarter last week, and the stock has been clobbered. I am stepping up and adding CREE common to the portfolio today.