Cree, Inc. (CREE)

Great company in a great and growing industry, but getting very, very pricey; particularly in an commoditized industry that should have a glut of capacity by 2011. The risk here is that growth in LED lighting increases CREE's revenues so much that earnings skyrocket upwards over the next 5 years and drive the price even higher than the current $62 price point. But I'm betting against that. My view is that revenues will grow, but margins will shrink over the next 5 years.

Free cash flows are probably in the $1 - $2 per share range currently and Net Tangible Assets are around $14 per share. That gives Cree a Price/NTA ratio of about 4.5, which seems very high in a commoditized industry. I wouldn't want to pay more than 2.5 - 3.0 times NTAs in this kind of industry.

The highest analyst project for 2011 I see is around $1.72 per share. That gives CREE a forward PE of around 36. If you assume that CREE can earn $2 per share with a strong revenue growth rate, I'm still not sure that it's worth $63+ per share. Let's say $3 per share before earnings level off --- that probably gives them a valuation of about $60 at best.

I could definitely be wrong and I do believe Cree is a spectacular company in an absolutely vital and growing industry. Just think that $62+ is getting very expensive.