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After A 30%+ Gain In 4 Months, I'm Holding On To This Stock

 April 18, 2012 10:22 AM

(By Street Authority) Investors are often faced with a clear conundrum -- what to do with a stock that holds great long-term promise and stumbling near-term execution. That question has been vexing me ever since I addedshares of Cree Inc. (Nasdaq: CREE) to my $100,000 Real-Money Portfolio in early January and then shares make a quick upward move.

[Related -Cree, Inc. (CREE) Q2 Earnings Preview: What To Expect?]

At the time, I wrote that gross margins were unlikely to post a near-term rebound after slipping from the low 40s to the mid 30s. And I added that investors were concerned that results wouldn't improve until bloated inventories were worked down. My conclusion: "The future direction of this stock will hinge on how these numbers trend." Yet I also thought the stock had tangible downside protection trading in the low $20s.

I was wrong. Investors embraced this stock much more quickly than I expected, turning Cree into the strongest gainer in my portfolio. Kudos to the crowd for spotting the great long-term opportunities in front of this LED lighting supplier.

Just a few weeks later, investors again showed a newfound farsightedness, overlooking another challenging quarter, which I discussed here.

Well, this time around, investors aren't in such a forgiving mood. Shares of Cree slipped back below $30 in after hours trading on Tuesday, April 17, after the company delivered a subpar fiscal third quarter. The key culprits: you guessed it -- weak gross margins (34.9%) and a bloated inventory (worth 96 days of sales). Adding further pain, guidance for the fiscal fourth quarter is also uninspiring: The midpoint of the targeted sales range is $305 million, below the $324 million consensus. Non-GAAP earnings per share (EPS) are expected to be around $0.23, below the $0.28 consensus.

The bright side
This is still very much a growth story. Even that lowered sales guidance represents a company record and 30% growth from a year ago.

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