Cree Stock Drops After High-Profile Downgrade

J.P. Morgan cited China trade tensions as a headwind for CREE

Managing Editor
Nov 30, 2018 at 11:44 AM
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The shares of Cree, Inc. (NASDAQ:CREE) are down 4.2% to trade at $43.97 this morning, after J.P. Morgan Securities downgraded the LED specialist to "underweight" from "neutral." The analyst in coverage cited trade tensions with China as a possible disruption to the company's supply chain and sales prospects, and said the shares look overvalued at current levels. 

The brokerage firm also reiterated its $35 price target, a 25% discount to the stock's price. The bearish sentiment is nothing new though, with seven of the 11 brokerages covering CREE rating it a "hold" or "strong sell."

On the charts, Cree stock bounced off the $34 level back in mid-October, and topped out above $46 yesterday. As such, CREE's 14-day Relative Strength Index (RSI) closed last night 67-- on the cusp of overbought territory -- suggesting a near-term pullback may have been in the cards. Yet despite the downturn today, the security still boasts a 24% gain year-over-year.

Daily Stock Chart CREE

In the options pits, the rate of call buying relative to put buying has been quicker than usual in recent weeks, albeit amid limited absolute volume. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 4,055 calls were bought to open in the last 10 days, compared to just 152 puts. This resultant call/put volume ratio ranks 2 percentage points from an annual high.

Given that the 12.78 million shares currently sold short represents nearly 13% of CREE's total available float, it's possible that some of those calls may have been bought by shorts seeking an options hedge. Whatever the reason, it's a prime time to buy premium on the equity's near-term options. CREE's Schaeffer's Volatility Index (SVI) of 40% ranks in the 21st annual percentile, meaning short-term options are relatively cheap, from a volatility perspective.


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