Will the Bleeding End for Cree, LED Stocks?

(Cree, LED lighting stocks story updated for bearish Cree options trading)

NEW YORK (TheStreet) -- The outlook for LED lighting sector stocks, including industry bellwethers Cree(CREE), Veeco(VECO) and Aixtron(AIXG) dimmed a bit this week.

There were a spate of negative reports on the inventory build-up in the LCD flat-panel television sector on Wednesday, sparking a new negative read-through for companies linked to the LED supply chain for flat panel TV backlighting.

Industry consultant iSuppli was out with a report showing high inventory levels in the LCD market. The iSuppli data was one data point among a raft of negative numbers in a Wall Street Journal report on Wednesday detailing the bleak conditions among LCD TV makers, with utilization cuts coming from companies in the market. Weak demand in Europe and the U.S., a much-anticipated (but never to occur) surge in World Cup television buying, and an inventory backlog of six to nine weeks in July, were all mentioned in the WSJ report.

Boston-based securities firm Avian Securities downgraded Veeco and Aixtron to neutral, citing the same higher inventory in the LCD space and weak consumer spending.

If it seems like the sudden flood of negative news for the LED lighting stocks that sell into the LCD TV market came out of nowhere on Wednesday, it didn't. In fact, reports about the LCD inventory build-up and a looming rationalization of supply of LEDs for the TV market have been bandied about for months already. Veeco and CREE slumped by near double-digit percentage margins on Wednesday, and Aixtron declined as well, but it's just the latest selling pressure on these shares.

Since August 9, Cree shares are down by more than $22. In the case of Cree, its recent lowering of revenue guidance for the September-end quarter exerted specific pressure on shares.

Veeco shares are down $12 since early August.

Of course, August was a tough month for the markets in general, but more concerning for these LED stocks is that they've been on a downward trend since reaching year-to-date highs in April.

Bill Ong, an analyst at Merriman Curhan Ford said that the Wednesday selling action was pretty late in the game for those in-the-know about the LED sector. This doesn't mean Ong thinks stocks like Cree and Veeco won't fall any lower before the cyclical slide is over -- indeed, he thinks they will sink more -- but the analyst thinks that the unraveling in the LED sector has to be seen as beginning earlier, and lasting longer.