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Is Cree or Rubicon Ripe for a Rally?

NEW YORK ( TheStreet) - The big equities rally and shift in macroeconomic sentiment hasn't catapulted LED stocks out of their doldrums.

In fact, shares of two of the main LED lighting sector plays, Cree (CREE - Get Report) and Rubicon Technology (RBCN - Get Report), remain tethered near their 52-week lows, even as green energy stocks, by and large, and technology stocks have moved higher this week.

Both stocks are dominant forces at opposite ends of the LED spectrum. Cree is the bellwether in the LED lighting market, and is vertically integrated, makings its own LED chips and components. Rubicon manufactures the sapphire substrate used as the raw material by many LED manufacturers, with one notable exception being Cree.

The analyst ranks are showing the usual divide on these two LED stocks. Within a week, KeyBanc launched coverage of Cree with a buy rating, only to be followed by a Morgan Stanley note that said things will get worse for Cree before they get better in the second half of the year because of pricing and margin concerns. Cree headed south after the Morgan Stanley note, even though the note included more bullish commentary on overall LED market demand.

Rubicon, meanwhile, continues to be a favorite of short investors who see nowhere for its high margins to go but down as competition increases in its niche.

Cree shares have lost more than 20% in June, while Rubicon's stock is off about 25% for the month. Cree was up 3% to $33.41 in recent trades but it scraped a 52-week low of $32.40 earlier in the week. Rubicon is back above $17 in Thursday's session, enjoying a modest bounce since hitting a 52-week low of $15.51 on June 17.

Are both of these LED stocks oversold and due for a rally? Is either Cree or Rubicon more likely to turn the corner and gain back investors before the other? Here are some keys to the outlook of both LED stocks as they struggle to break out of troughs in share price.
  • The Cree Case
  • When it comes to supply and demand, visibility remains low in the LED sector. Investors have lost confidence in Cree over the past year in terms of its ability to provide visibility on the sector. Every time a bull steps up to say that the demand scenario is improving, the truth turns out to be different.

    For example, last November, when Cree was also at a trough point, Morgan Keegan launched coverage of the LED stock with a conviction buy rating and said that the demand scenario was improving in Asia.

    But things got much worse for Cree before they got better, with a rally in December 2010 petering out quickly, and Cree shares are down 50% year-to-date.
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