Thoughts on VECO After a 13% Fall

Less than two weeks ago, high flier Veeco Instruments (VECO) crushed second quarter earnings and revenue estimates and also raised forward guidance. In the wake of the strong earnings report, analysts at two firms, UBS and Merrill Lynch/BofA, raised their target stock price for VECO to $60 and $65, respectively.

VECO closed at 45.52 on Wednesday, up 2% from the pre-earnings price. Yesterday, however, the stock fell 13% to 39.61 in a move that was attributed to a report in a Taiwanese newspaper that flat-panel display manufacturers would be cutting back on LED orders.

While some analysts debated whether the market may have overreacted to this report, we were fortunate enough to have an earnings report from Rubicon Technology (RBCN), an important supplier to LED chip manufacturers, right after the market closed.

As was the case with Veeco, Rubicon beat on both earnings and revenues and also issued upside guidance. Rubicon’s President and CEO Raja Parvez had only positive things to say about demand in the LED market:

“Demand continues to be very strong from the LED market as the adoption of LED back lighting for medium to large displays such as LED LCD televisions, desktop monitors and Notebook and Netbook computers continue at a rapid pace and general lighting applications for LED continue to advance.” [see Seeking Alpha conference call transcript for more details]

In after hours trading, Rubicon was up 1.5%, while Veeco added 0.6% on low volume.

After today’s big loss, Veeco is now 29% off of its 52-week high, which was established in late April. While I generally do not trade much after hours, I did use today’s selloff and the Rubicon earnings report as an opportunity to pick up some VECO shares.

Normally after a stock is hammered and I think the selloff is overdone, I like to sell puts that are at the money and figure that if the premium is high enough, I will win whether the stock reverses course and rallies or continues to struggle, with the result that I am assigned the stock. Thanks in part to the big spike in implied volatility (see chart below) VECO’s August 40 puts, which have 14 days until expiration, were last quoted at 2.20 – 2.35. An investor could sell the puts and have a cost basis below 37.50 should they end up in the money. Alternatively, one could buy the stock and sell the August 40 calls (1.80 – 1.95) and get a 4.7% yield for two weeks of effort.

Valuation should not be a deterrent here. Right now VECO is valued at 9.0 times 2010 consensus earnings and only 8.2 times anticipated earnings for 2011.

Whether one favors stocks or options, there are a lot of interesting opportunities springing up in VECO in particular and in the LED space (including CREE and AIXG) in general.

For more on related subjects, readers are encouraged to check out:

• The Often Overlooked Put Writing Strategy
• Graphical Comparison of PutWrite and BuyWrite Indices
• More on PUT Returns
• CNBC Million Dollar Portfolio Challenge: Top 0.1%
• Movin’ on Up

[source: Livevol Pro]

Disclosure(s): long VECO at time of writing; Livevol is an advertiser on VIX and More

CNBC Million Dollar Portfolio Challenge: Top 0.1%

OK, so I didn’t buy Amazon (AMZN) before their earnings report and missed an opportunity to log an ‘easy’ 27% gain yesterday. I still made up some ground, however, with a more than respectable 2.9% gain in VECO.

My portfolio is now up to $1.69 million, but with tenth place in the CNBC Million Dollar Portfolio Challenge at $2.93 million, the task ahead continues to be a formidable one. On the plus side, at #1260 out of 1,324,502 contestants, I can at least claim to have made it into the top 0.1%.

As this contest has progressed I have discovered the need for an earnings spike potential algorithm and have spent some time testing and refining such a beast. Yesterday, before the close, it kicked out three companies with a high potential to spike after they reported earnings after hours. The good news is that the algorithm (which I will be glad to talk about after this contest is over) produced three highly volatile plays for today: SWKS (up 21% a little after noon EDT); HLIT (down 15%); and ARBA (down 9%.) Of the three, I looked hardest at SWKS and ended up passing on this one, as well as the other two. The potential for volatility was certainly there, but I was concerned that it was more likely toe be in the wrong direction. Instead, I went with a slightly less volatile play that has been showing a lot more momentum in the run up to earnings: GSI Commerce (GSIC), whose retail e-commerce solutions helped deliver a quarter that was good enough to overcome two analyst downgrades that knocked the stock down early this morning. After opening down 5.3% this morning, the stock has rallied to where it is currently trading up 4% on the day.

And now for the horn tooting portion of this post. For those who are late to the CNBC party, in the past when I have tooted my own horn here I have used the opportunity to highlight one of my favorite horn players. First up were two jazz trumpeters: Clifford Brown; and Lee Morgan. Today I want to turn my attention to classical music and Dennis Brain, who may be the greatest classically trained horn player of the modern era. If you are not sure whether you are a fan of classical music, you owe it to yourself find a way to introduce your ears to Brain’s 1953 rendition of the Mozart horn concertos. If this turns out to be a transformational experience in your life, don’t say I didn’t warn you.

Movin’ On Up

As of last night, I have moved up to #1565 in the CNBC Million Dollar Portfolio Challenge. With 1,273,430 contestants in the running, it appears I will need to pass another 292 to make it in to the top 0.1%. If that happens, I’ll set my sights on the top 1000, then maybe…

My reality check is that tenth place is currently at $2.89 million, safely ahead of my $1.64 million war chest.

As I described yesterday, I rode AKS up after their strong earnings report, but the stock ran out of steam late in the day and finished with a 4.2% gain for the session. Of course I dumped AKS at the end of the day and elected to put my chips on Veeco Instruments (VECO) – a nanotechnology equipment company with a focus on the semiconductor industry. VECO has had a difficult year, lowered guidance for the most recent quarter, and delivered some lackluster numbers last night. Still, strength in their MOCVD business has brightened the outlook somewhat and helped push the stock up 2.5% this morning.

For the record, I recognize that Amazon (AMZN), which is currently trading up 20%, was the obvious earnings play last night, but my thinking is that if you are trying to beat the crowd, you increase your chances dramatically by getting off the beaten path. I can only hope that when it comes to Amazon at least, my competition is thinking along the same lines…