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I Found a Billion-Dollar Market – In My Backyard

9 | By Michael A. Robinson

The end-of-year holiday season is a time for memories and reflection and I found myself engaging in a little of both the other day.

I was alone at the house, and was stringing up some Christmas lights and found myself drifting back in time … to middle school and high school.

In seventh grade, I got my first part-time job – changing light bulbs at an apartment complex. I also began designing and building custom light boxes using colored bulbs controlled with staggered timing switches.

In my freshman year in high school – for my electronics class – I put together a pretty sophisticated strobe light from a nice kit. That was my introduction to capacitors, diodes and wiring diagrams.

There was a reason for this mental road trip.

You see, the lights that I was stringing up around the perimeter of my house the other day happen to use a very specialized technology.

And this specialized technology is something that I knew you’d want to hear about because it represents a massive profit opportunity.

Today I’m going to tell you all about the technology. And I’m going to show you my single-best idea for making money from it.

Home Improvement

Of course, I’m talking about LEDs, which stands for “light-emitting diodes.”

As a veteran analyst out here in Silicon Valley, I know that this technology is state-of-the-art. And as a consumer and lifelong electronics nut, I can honestly say this lighting is the most beautiful I’ve ever used. At our house this holiday season, LED lighting graces the family Christmas tree inside the house – and our Japanese maple tree out in the yard.

As I stood in our backyard, admiring my handiwork on a moonless night, I finally realized that this lighting technology is every bit as beautiful as it is efficient.

This is truly one of those rare instances where aesthetics and investing go hand-in-hand…

See, the low-heat glow given off by LED lighting will serve as the catalyst that helps this technology sweep the nation and become a billion-dollar-plus business by the end of this decade.

And it all started with the simple light bulb…

My deep understanding of this field is one of the reasons why I’m such a big fan of Cree Inc. (NasdaqGS: CREE). Founded in 1987, the Durham, N.C.-based company introduced its first LED just two years later – long before the nation was ready to accept this technology for everyday use.

Particularly back then, LEDs represented a huge advance in technology, but the applications were severely limited. The technology itself was still somewhat limiting: Three decades ago, LEDs were really only available for specific wavelengths – such as blue or red – as opposed to the white light used all over the world.

LEDs are solid-state devices based on semiconductor technology. In fact, a diode is a very simple semiconductor, and LEDs are literally semis that are specially designed to emit light.

Today there’s a massive – and I mean massive – potential market. And Cree has a chance to crack it. Right now, only about 1% of all light sockets in the U.S. have LEDs installed in them.

Industry analysts estimate that people buy about 2 billion light bulbs a year, or more than 5 million a day.

If you do the math, that roughly works out to $1 billion in annual light bulb sales.

A Billion Here, A Billion There

I’m going to let you in on a secret that the rest of the investment world seems to have missed.

Most analysts use that billion-dollar figure to estimate total LED sales by the end of the decade.

But I think that forecast falls way short of the industry’s potential.

Here’s why. The forecast doesn’t account for commercial buildings. Nor does it include sales of LEDs for cars, where the technology is really catching on. Ford Motor Co. (NYSE: F), Volkswagen AG and Chrysler LLC, just to name a few, use them for headlamps, parking or taillights.

And now this exciting technology is finding its way into billboards and streetlights.

Just as an example, the Bay Bridge linking the East Bay to San Francisco is adorned with an artistic necklace of lights that utilizes 25,000 LEDs.

Moreover, that $1 billion estimate includes the value of the incandescent bulbs that were once nearly ubiquitous – until the U.S. Congress banned them a few years back because they’re so energy inefficient.

Indeed, an LED bulb can easily cost 20 times more than an incandescent one, which retailed for as little as $0.50. Over their lifetime, however – and this is crucial – LEDs are much cheaper to operate than either incandescent or high-output halogen bulbs.

To fully understand this, let’s return to my personal, real-world example.

Hard to Believe

As I stood in my yard staring at the Japanese maple the other night, I engaged in a bit of mental arithmetic. The fixtures I bought cost twice as much as the halogen ones I replaced. But they included the LED lights and are guaranteed to last 50,000 hours enough to burn ’round the clock … for more than 2,000 days.

And I can personally attest to the LEDs’ energy efficiency. Just to prove a point, I put on a pair of work gloves and touched a mini halogen bulb while it was on.

That bulb was so hot that it almost burned right through my glove. But I felt no heat at all from the LEDs – even after touching them with my bare hands.

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You don’t have to take my word for it. The U.S. Department of Energy estimates that switching to LED lighting over the next 20 years could save the nation some $250 billion in energy costs.

The conversion also would reduce electricity consumption for lighting by nearly one-half, the agency says.

For its part, Cree has carved out a commanding position in the growing LED sector. Over the past two years, the firm has refocused its operations to become more vertically integrated as a way to both lower overhead and expand into new markets.

Take its August 2011 purchase of Ruud Lighting for $520 million. The deal greatly enhanced Cree’s position in the markets for streetlights, and lighting for hospitals, retail stores and indoor commercial establishments.

At the same time, the company improved its research-and-development (R&D) operations and is limiting inventory to further squeeze costs.

Taken together, these moves have improved Cree’s competitive advantage over challengers from China and other low-cost domestic importers.

All of Cree’s efforts are paying off in the form of rising sales and surging profits.

And here’s how it could pay off for you …

Packing a Punch

For its fiscal first quarter ended Sept. 29, Cree reported sales of $391 million, a 24% gain from the year-earlier period. Earnings per share (EPS) jumped 44% to 39 cents.

Ordinarily, a report like that would ignite a nice little pop in the company’s share price.

Instead, just the opposite happened.

Cree revised its guidance to show slightly lower growth for the current quarter as it spends more on marketing its line of LED bulbs for the retail market.

The stock got pounded back on Oct. 22, plunging nearly 17% in a single session.

Here’s the thing: I believe the market grossly overreacted to the news.

In fact, I believe you right now have the chance to invest in the LED industry leader at the kind of discount that bakes a “margin-of-safety” into the share price.

Cree’s shares currently trade at about $58 a share, giving the company a market cap of roughly $7 billion.

And the company is financially sound. It has an operating profit margin of 9% and is cash rich. Last year, it brought in $125 million in free cash flow (FCF) and has $1 billion in the bank with virtually no debt.

As we work together to pursue wealth here at the Strategic Tech Investor, we usually target stocks that have a good shot at doubling in price. But we also don’t want to pass up big profit opportunities that are right in front of us.

In a recent STI column, I forecasted a Standard & Poors 500 Index return of 15% in 2014. And after carefully studying Cree, we believe Cree could generate a return twice that of the broader market in the New Year.

In other words, we are predicting it could offer double the market’s return – or a gain of 30%.

To generate that kind of gain, the stock would merely need to recover to its one-year closing high of $75.76, established back on Aug. 13.

Rebounding to that price doesn’t take into account the huge earnings gains the company has reported of late – or the payoff on all that R&D money. If you factor that in, an upside of 45% or more over the next two to three years is entirely possible.

Cree represents one of those special situations that we’ve talked about in the past. By definition, stocks of this type do pose a bit more risk than average.

But gains of 30% to 45% make for a worthwhile potential payoff.

All of this ran through my mind as I finished my backyard lighting project, packed up my toolbox and flipped the switch that caused our Japanese to blaze to life.

After decades of development – with LED technology having finally reached critical mass – the lighting capabilities that I’ve described to you today can achieve the same for your portfolio … causing it to blaze to life.

In the meantime, we’ll continue to ferret out these special profit opportunities for you.

[Editors Note: Stocks aren’t the only investment that Michael is watching.  Hes got his eye on a phenomenon that is white-hot right now: Bitcoins.  This “virtual currency” recently soared from $131 to $1,150 in just the past two months – a return of 778%. It’s one heck of a story. And it’s one that Michael understands better than anyone. Take a look here and you’ll see what I mean.

9 Responses to I Found a Billion-Dollar Market – In My Backyard

  1. Sky says:

    I live off the grid in Hawaii and LOVE LED’s I even have an off-grid saltwater aquarium that is lit by LEDs. Thanks for the tip.

  2. tom chorba says:

    I took your advice regarding bit coins. My youngest son, Dan, attempted to educate me on the virtues of bitcoins about 1 week before I received your article and recommendations. I decided it was time to at least experiment with bitcoins. On Dec 6th, I bought one bitcoin at a cost of $1034. I followed the steps to make the purchase, but quickly became confused on how to pay for my purchase. After a quick e-mail to the seller, I found that I had to physically withdraw the money from my bank, and make a cash deposit at the Seller’s bank (in this case, Wells Fargo Bank). I did so, and I filled out the deposit slip as recommended and then made a copy which I attached as an enclosure to e-mail sent to the seller. Then I sat back and waited, and waited, and waited some more. I kept going on-line to view my “wallet”, but it was still not showing the purchase. The next morning I again went on-line to view my wallet, and once again, no deposit showed. I check the current price for the coins, and almost fell out of my chair. They had experienced a free-fall the day I remitted the payment to the seller. The going price fell to about $700 from $1034! By this time I felt I was screwed. I e-mailed the seller to find out what was going on. Apparently China knocked the wind out of the bitcoins when they declared them illegal. Naturally, that shocked the market, and there was a sustained knee-jerk reaction to that news. The seller quickly put my mind at ease, however. He told me he was watching the market before he fulfilled my order, waiting for it to stabilize. He then fulfilled my order at the rate of $740. I checked my wallet and there they were, 1.398554 BTC. Today, my $1034 purchase is worth $ 1,360.37, as of 3:00 pm. I made a profit of $326 in just 4 days!
    Thomas

  3. John Currie says:

    Michael,

    i sell LEDS and I can tell you that they have come a long, long way. Not all of the way there yet, but if any company has a leg up, it is Cree.

    Soft white light is the issue (2700 on the Kelvin scale) Most companies can’t match it; it’s the color put out by your household 60 watt bulb, candelabra bullb, reflector bulb in high hats.. Put a CFL (twister, or ordinary LED next to one, and tell me what you think)

    While bright white light is great for tasks and streetlights, maybe schoolrooms, etc; pople still like the ambience of 2700K in their homes and in clubs , saloons restaurants, and taverns. Cree is ahead of everyone on this in my estimation.

    The other nagging problem with LEDs has been dimmability; they score here as well.

    • Michael Robinson says:

      Hi John,

      Thanks for sharing your comments with me. It was great to get your feedback and hear that, as an expert in the field, you like and respect their products. Much appreciated.

      Cheers and best wishes,

      Michael

  4. woodlawn says:

    I love LED LIGHTS. I HAVE INSTALLED led refit kits in my kitchen. The results are amazing. One led light refit kit in an overhead can is so bright i use it to light up the entire kitchen . The usage has dropped from 60w down to 14w for each light.

  5. jose reboredo says:

    I called my electrical contractor to change the parking lot lights (to LED) on my rental buildings and he recommended me Cree, their catalog information was not much help for what I was looking for but afer some calls to them we ordered the lamps and it took them around two months for the delivery.

    Looks to me like a poorly organized company.

    • Michael Robinson says:

      Hi Jose,

      Thanks for checking in with me. I appreciate your taking the time to share your comments with me. I’m sorry to hear that your interaction with the firm was less than satisfactory. Those are the kind of details I can’t always lay my hands on when researching a company. Should you chose to work with Cree again, I hope you have a better experience. I’ll keep your comments in mind should I do a follow up column about the firm and the LED market.

      Cheers and best wishes,

      Michael

  6. cic says:

    michael – re Jose/2 mo delivery – i would (in your position) DEFINITELY call Cree and try to get better info as to the cause. Jose does mention contractor – so i wonder if it had anything to do with them.
    As for catalog – WELL there are NUMEROUS companies that have catalogs with less than even basic specs/info on their product. A GOOD co should at least invest in that. After all, that is their “front” door..?

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