Tuesday, July 29, 2014

The Best Stocks to Play the LED Lighting Boom

Shareholders in lighting company Acuity Brands were given a rude reminder of the risk of holding a highly rated stock recently. The company's third quarter results missed estimates and the stock plunged more than 15%. But it might not all be so bad. Acuity's management doesn't give earnings guidance, so Fools should expect some volatility around the results. In addition, the company is attractive for a host of reasons, many of which also apply to Cree  and Hubbell . Is this a good buying opportunity in Acuity Brands?

Acuity Brands, Cree, and Hubbell: cyclical and secular growth prospects
Acuity Brands is attractive because it has cyclical growth prospects via an upturn in spending in the commercial and industrial construction sector. In addition, it also has a secular growth story from the growth in utilization of LED lighting. Given the company's P/E ratio of 33 times current earnings, it's reasonable to conclude that Acuity needs both these growth drivers to perform in order to take the stock higher.

The good news is that the indications from Cree's LED lighting results is that the secular story is very much intact. Cree manufactures LED products, lighting (LED based), and power and radio frequency products. In its latest set of results, LED products (which service a range of industries) only grew 3%, but Cree's LED lighting solutions grew 35% and now make up 44% of its total sales from just 37% last year. Moreover, Cree's management expects "double digit growth in lighting in both LED fixtures and LED bulb" -- good news for Acuity because LED lighting sales now make up a third of its overall sales.