Call Options Or Put Options On Cree (CREE)?

| June 19, 2013 | 0 Comments

CREE OptionsCree (CREE) develops lighting-class LED products, lighting products, and semiconductor products for power and radio-frequency applications.  The company’s products are used in video screens, gaming displays, function indicator lights, automotive backlighting, and more.

CREE is currently trading for $65.70.  The shares are up an impressive 94% year-to-date.  The stock is 195% off its 52-week low of $22.25 and just bypassed the 52-week high of $64.32. 

Is this an opportunity to buy call options on CREE due to the company’s robust revenue and earnings growth?  Or should you buy put options on CREE due to the stock’s lofty valuation?

The bulls make a convincing argument…

Last quarter, CREE’s revenues grew by 23% year over year, while earnings climbed 134%.  Those are very strong numbers in a relatively sluggish economy.

Even better, the LED market continues to rapidly expand.  As consumers learn about the benefits of LEDs (highly efficient and better for the environment), the demand for the products has been ramping up.  In other words, it’s reasonable to believe CREE’s impressive growth can continue.

What’s more, the company has just under $1 billion in cash with no debt whatsoever.  That gives management plenty of options on how to move the business forward.

But the bears have a compelling case as well… 

CREE shares are trading at a lofty valuation.  As of this writing, the stock’s sitting at 111.4x earnings.  It’s very difficult to justify that kind of valuation based on expected growth.

Even if you take into account expected future growth, the shares are still trading at 35x projected earnings.  That’s nearly double the industry average.

CREE would basically have to make no mistakes and grow even more than analysts expect.  That’s a hard path to follow.  And at the current price, the company is setting investors up for disappointment should anything go wrong.

Does CREE’s strong growth make it a buy?  Or is the extremely high stock valuation a reason for concern?

If you think the bulls are right, take a look at buying the CREE July $70.00 calls for around $1.55.

If you think the bears are right, take a look at buying the CREE July $62.50 puts for around $1.90.

Yours in Profit,

Gordon Lewis

Tags: , , ,

Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.