Perplexing Research – Hot Stock, or Not?
"Two divergent pieces of research just hit the Street that seem so contradictory, it's perplexing," said Cramer.
And both pieces of research involve the future prospects of Cree, a leader in LED lighting.
On Tuesday, Stern Agee cut their price target from $66 down to $59 citing channel checks. Then, within a few minutes Lazard raised their price target from $62 up to $73 citing channel checks?
In situations such as this, Jim Cramer can't resist rolling up his sleeves. "When two analysts come out with totally contradictory opinions, you get a chance to process the best arguments from both sides so you can make the most informed decision possible about where a stock is headed next," Cramer said.
The Bull Case
Lazard raised their price target because channel checks suggested Cree products had started to resonate with consumers.
"These new products were nearly sold out at many stores, in part because they actually look like an old fashioned light bulb and not a prop from a low-budget science fiction movie," Cramer said.
In addition, the research showed lower prices didn't squeeze profits. "Cree's new 40 and 60 watt equivalent LED bulbs sold for less than $10 (a relatively inexpensive price point for these new bulbs) but the lower price didn't hurt the company's gross margins," Cramer said.
The Bear Case
Sterne Agee downgraded the stock mainly because their channel checks suggested that Cree's light bulb business could be in serious danger of getting squeezed out by competition from Philips, the giant electronics company.
"Analysts at Sterne Agee think that roughly half of Cree's distributors carry both Cree and Philips, and believe that those distributors will stick with Philips, which has a much broader product portfolio, if they're forced to choose. Taking the thesis one step further, Sterne Agee thinks that this could put 15 to 20 percent of Cree's total sales at risk during the current quarter and the next one."
Although the research may appear to be contradictory, Cramer doesn't think it is.
"It turns out that Lazard's checks were only with Home Depot, which is a big customer for Cree, but the key here is that Cree sells to Home Depot directly—they don't use any intermediaries," Cramer said.
"Sterne Agee did something different, they checked with the lighting agents who account for the other two thirds to four fifths of Cree's light-bulb sales. So Philips could be squeezing Cree out with these agents; but you'd never know it if you only spoke to Home Depot," Cramer explained.
Because the methodologies were so very different, Cramer thinks the smart move is to take the research and weigh it against key metrics.
And those metrics show "Cree is is selling for 33 times next year's earnings estimates with a 16.5% long-term growth rate. That's not cheap." Cramer can't side with Lazard.
But he can't side with Stern Agee either.
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"I do like this company, as a play on the shift away from old-fashioned light bulbs and towards light emitting diode or LED based lights that are more energy efficient," Cramer said.
Conservation and energy efficiency is a fundamental trend that Cramer thinks has legs.
Therefore, Cramer is a buyer but only on a pullback. "I actually hope the bears are right, and that Cree will get hit the next couple of times it reports, because that would generate some terrific opportunities to get in."
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