(By Balachander) Cree Inc. (NASDAQ: CREE) shares were downgraded to "perform" from "outperform" by Oppenheimer based on valuation.
The brokerage, which removed price target of $42 on the stock, believes now is a good time to take money off the table.
"CREE currently trades at a 35x forward P/E multiple, a two-year high. Although we believe in the technology advantage of CREE and the long-term growth prospects of the LED lighting market, the near term may not be "all clear" to support such lofty valuation," Oppenheimer said.
The brokerage believes the stock could continue to rally over the next 3-6 months as immediate headwinds seem overblown, China orders pick up following the New Year, and spring ushers in more favorable weather for municipal and new commercial lighting.
[Related -Cree, Inc. (CREE): Can The LED Maker's Results Show Some Light?]
"However, visibility remains limited and longer term competitive dynamics linger; to us, risk/reward looks balanced," Oppenheimer said.
"Cree is still our favorite name in the LED supply chain, but valuation prompts us to take a more conservative stance and wait for a better entry point," the brokerage wrote.
CREE's shift to a fixture business, and its component business fighting the commodity bug, each present unique challenges over the long haul. The brokerage sees CREE as ultimately being successful, but also don't see the risk these challenges present priced into the stock.
CREE shares fell 0.39 percent to trade at $45.54 on Tuesday. Over the past year, the stock has been trading between $22.25 and $46.88.