News Analysis date published New: 
Wednesday, August 8, 2012 - 09:00
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Wednesday, August 8, 2012 - 14:38
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Wednesday, August 8, 2012 - 09:00

I'm Selling One of My Real-Money Portfolio Picks

Wednesday, August 08, 2012 9:00 AM

With June's quarterly results now in, I have a fresh take on three of my $100,000 Portfolio picks that I wanted to share with you.

Cree Inc. (Nasdaq: CREE), Echelon (Nasdaq: ELON) and Exide Technologies (Nasdaq: XIDE) have all announced results that reflect a very tough economy. Exide is in fact the stock with the most upside of this group, in my view. But counter-intuitively, it's the stock I'm selling now.

Let me explain...

Echelon: still plenty of upside
It's no secret that all discretionary spending is being curtailed in this tough economy. For Echelon, a provider of smart grid technologies, this means major utilities are extremely hesitant to commit to new investments right now.

When I bought this stock in late March, I noted that because of an industry slowdown, "Analysts expect sales to grow just 8% this year to around $170 million, and even that forecast may prove to be optimistic."

Sadly, I was more right than I realized. Echelon just announced that customers are still holding off on major commitments, and sales are actually likely to be lower in 2012 than they were in 2011. What I thought would be an improving picture in late 2012 or early 2013 has now been pushed out by a few quarters -- at a minimum. Frankly, Echelon may not deliver on the promise I laid out for at least another year.

So is it time to sell?

No. Echelon still has $59 million in cash and only $21 million in debt. The company's quarterly cash burn is modest, and this company faces no sort of a financial distress. I also know that Echelon's $150 million market value greatly discounts the value of the company's technology base, and I think it is a matter of when -- not if -- this company will start to generate solid new orders. When that phase of this company's ongoing boom-and-bust cycle comes, this stock will likely be far higher than it is now.

Time to book profits in Cree?
When I launched my $100,000 Portfolio at the start of the year, I moved quickly to make sure I owned a piece of one of the most exciting multi-year growth opportunities out there. LED lighting maker Cree, Inc. (Nasdaq: CREE). As I noted back then, Cree possessed one of the most dynamic business models I've come across in a while. The fact that shares had fallen from $70 in early 2011 to the low $20s simply made this stock too hard to resist.

Since then, a lot has happened. Cree has delivered slightly sub-par quarterly results -- three times in a row -- and the guidance for the next quarter is a bit weak as well. Moreover, the global economy now looks far worse than it did at the start of the year, likely slowing the adoption of LED technology.

The fact that the stock is up more than 10% since I bought it -- despite the headwinds -- might be grounds enough to book profits. But I'm resisting the urge.

That's because the long-term outlook for LEDs remains quite bright (if you'll pardon the pun), and I still think this stock has 50% or even 100% upside when the inflection point in demand for this technology finally arrives. The fact that a strong balance sheet and Cree's technology leadership in the industry also tells me that shares are unlikely to fall below the low $20s. In effect, this is still a lower-risk, high-reward set-up, despite the dowdy 2012 economic picture.

Exide -- time to sell
Yet it's the third pick, battery maker Exide Technologies, that has me growing concerned. Recently-released quarterly results represent a clear step back from the March quarter results I discussed in this article.

The company's expenses involved with the recycling of lead remain too high, which is keeping Exide in a dicey financial state. The fact that Exide still carries more than $750 million in debt is precisely the financial risk I don't want to be exposed to in this economy. If the economy gets worse, will the company generate enough cash flow to maintain financial covenants? As it stands, Exide has generated $16 million in operating income over the past six months but paid out $33 million in interest expense. That can't go on forever.

Make no mistake... I think Exide's management team is doing an excellent job in a very tough environment. I also think that with a few breaks in terms of lead recycling costs and a pick-up in battery sales, this stock could soar far higher. There's a reason why this was a $10 stock, 200% above current levels, just 15 months ago. Unfortunately, I don't think we'll be seeing a quick upturn in the near-term, and the scary economy keeps me from showing deep patience with a stock with so much debt.

Action to Take --> I will sell 1,500 shares of Exide Technologies 48 hours after you read this. If you want to be among the first to get updates on my $100,000 Portfolio holdings, go here to sign up for free.

David Sterman owns shares of CREE, XIDE.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.