LED Stock Winners: Cree, Veeco, Aixtron

Analysts say that the high beta LED stock plays will continue to experience volatile trading with uncertainty about the holiday season lingering for months to come. Patrick Ho, an analyst at Stifel Nicolaus, expects a narrow trading range for stocks like Veeco in the short-term.

"Consumer sentiment changes all the time and on a dime. A week ago, everyone was convinced the holiday season would be bad, and now today the retail sales numbers are a lot better than expectations, but consumer spending is not a stable number," the Stifel analyst cautioned. The analyst noted that when you review the recent commentary from tech giants like Cisco Systems (CSCO) and Hewlett Packard (HPQ), it reveals that corporate spending has been firm, but the same can't be said for the consumer side of the spending equation.

Stifel Nicolaus went to a hold on Veeco nine months ago, and even after the recent selloff, the Stifel analyst says it's too soon to change from a hold on an LED stock play, arguing that any short-term upside is limited by the short term downside risk. The oversupply situation in the PC and flat panel market which is been a point of debate for some time hasn't gone away with the latest batch of retail numbers or Corning's display outlook. These supply/demand imbalances are not typically one quarter phenomenon, but a several quarter correction, in the opinion of the Stifel analyst. Ho said that the uncertainty has been concentrated in the PC and LCD TV space, but the question is not whether there is a fire, but how big the fire is going to be.

Avian Securities Abrams' says that even with the better-than-expected U.S. retail sales numbers, he argues that the U.S. consumer spending outlook hasn't changed -- and, in fact, it's been Chinese spending that has carried the weight recently as the U.S. and Europe slumped. In this case, China has always been the bigger concern and will continue to be.

"We've been negative on the panel space for a few months, and unless we see a high volume run through the holiday season, inventory will still be out there," the Avian analyst said, adding that the bigger question is how much discounting goes on in China and during the holiday season in the U.S. If there is enough discounting, while the TV brands don't make much money, it drives unit volumes up, and that could help the LED stocks sooner rather than later.

Veeco management was also out speaking at an industry conference on Tuesday, presenting a familiar positive argument for its LED business: the percent of LEDs used in flat panel TVs will continue to increase even if unit volumes on TVs are slower overall.

Yet Avian Securities' Abrams says such comments can drum up some interest from investors, or at least lead to a little short covering, but he isn't betting on any quick turnaround in consumer sales and the positive read-through for LED stocks. Like many analysts, he is a bull on the long-term story for LED players based on the migration within the general lighting market to LED lighting. However, the situation for the LED stocks will continue to be dim, regardless of a one-day rally the likes of which occurred on Tuesday.

--Written by Eric Rosenbaum in New York.



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