The Nexxus (Nasdaq: NEXS) of the LED Universe

• BUY NEXS near $4.95

Nexxus Lighting Inc. (formerly Super Vision International) designs, manufactures, and markets light-emitting diodes (LEDs) and fiber optic lighting products. Nexxus products are primarily used for commercial, architectural, and signage applications.

Recently, companies focusing on LED lighting have seen dramatic moves in their stock prices due to legislation banning the use of incandescent bulbs resulting in increased investor attention. Color Kinetics (Nasdaq: CLRK) and Wall Street Mayhem pick Cree Inc. (Nasdaq: CREE) have seen their stock prices jump 30% and 15% respectively in the last two weeks. Although Nexxus is a more speculative pick than Cree or Color Kinetics, Nexxus should also benefit from the growing demand for LED lighting and the recent increased investor attention on the LED sector.

Nexxus manufactures and sells the Savi line of LED bulbs with True White Technology. The Savi line of LED bulbs reduce energy costs by about 75% and they last 15 to 25 times longer than traditional incandescent bulbs. Savi LED light bulbs are designed to last up to 5 years when operated continuously. Unlike fluorescent lighting, the Savi LEDs produce clean white light and they are environmentally friendly because they do not contain mercury and they require no special disposal procedures.

In December of 2006 Nexxus reached a comprehensive settlement with Color Kinetics over patent infringement issues. Nexxus agreed to pay Color Kinetics a settlement fee and Nexxus was granted a royalty bearing license allowing Nexxus to continue manufacturing and selling certain LED lighting systems including the Savi line of LED bulbs. As part of the settlement Nexxus also granted Color Kinetics a royalty free license to the LED patent #4,962,687 owned by Nexxus. Although Nexxus had hoped to emerge from these court proceedings with a clean patent portfolio, the settlement allows Nexxus to continue manufacturing and selling the Savi LED line while paying reasonable royalty rates. In the first quarter, gross margin dropped from 43% to 41% after the company started paying royalties to Color Kinetics.

On March 31, Nexxus released financial results for the first quarter of 2007. Total revenue was down 10% from the first quarter of 2006, but revenues in the commercial lighting division were up 30% due to increased LED sales. The decrease in total quarterly revenue was due to a decrease in sales in the pool and spa market. However, sales of commercial LED lighting systems were strong and the company forecast continued rapid growth in this sector.

Although Nexxus is a small company that is currently not profitable, it is well positioned to benefit from increasing demand for LED lighting solutions. In late March, Nexxus moved to a larger more cost effective manufacturing facility and the Nexxus Savi line is one of the first complete lines of LED light bulbs that can be used in existing lighting systems as well as new construction.

Legislation banning incandescent light bulbs is picking up steam sending shares of Color Kinetics and Cree significantly higher. Although Color Kinetics and Cree are the obvious investment choices to take advantage of the growing demand for LED lighting, as investors continue to focus on environmentally friendly LED lighting solutions, shares of Nexxus have the potential to realize gains similar to those recently seen in Color Kinetics and Cree.

Nexxus is a risky investment, but the current media and investor attention focused on LEDs could propel shares higher. For investors that are new to LED companies, Cree and Color Kinetics are safer investments, but for those investors that have already profited from Cree and Color Kinetics, we recommend taking some profits on CREE and CLRK and moving the proceeds into Nexxus.

Full disclosure: Wall Street Mayhem is long NEXS, CREE, and CLRK 

Update on Ninetowns (Nasdaq: NINE)

Yesterday Ninetowns announced that it has been selected as a winning bidder by the State Administration for Quality Supervision and Inspection of the People’s Republic of China (PRC) for servicing the free import/export e-filing software provided by the PRC.

Although it was expected that Ninetowns would be chosen to provide service for this software since Ninetowns created the software used by the PRC, this is still a significant milestone for Ninetowns. The ability to service the PRC’s free import/export software should allow the import/export software and service segment of Ninetowns to get back into the black.

The real growth for Ninetowns is still tied to the B2B initiatives recently started by the company including TooToo.com. However, the new servicing contract should allow Ninetowns to make a small profit on the import/export software side and create cross-selling opportunities for Ninetowns B2B platform.

This new contract win has made Ninetowns current valuation even more compelling. The company is sitting on about $115 million in cash, it has zero long term debt and a market cap of only $141 million. Ninetowns should now have some breathing room to fully develop B2B search initiatives without depleting cash reserves.

Can Cree Inc. (Nasdaq: CREE) help light up your portfolio?

• BUY CREE near $18.85, set stop loss at $17.50

Cree, Inc. (Nasdaq: CREE) develops and manufactures semiconductor materials and devices focused on light emitting diodes (LEDs). Cree has a market cap of about $1.6 billion, $265 million in cash, and no significant long term debt. The trailing P/E is about 22 and about 12% of the outstanding shares are held short.

It appears that the incandescent light bulb is on its way out. Although incandescent light bulbs are inexpensive, they use energy in a non-efficient manner and environmentalists think they have made a major contribution to global warming. Consequently, lawmakers in the US and abroad are talking about banning incandescent bulbs.

California and Canada are banning the use of incandescent bulbs by 2012 while Australia has announced plans to ban incandescents by 2010. Energy conservation and strategies to overcome global warming are becoming increasingly important political and social issues. Banning incandescent light bulbs is a relatively easy way to make a significant contribution to energy conservation. Therefore, the death of the incandescent bulb in the US and many developed countries is only a few years away.

Cree has the potential to be a major beneficiary of new legislation banning incandescent light bulbs. Cree’s white light LEDs have a longer life and use less energy than incandescent light bulbs. In the US lighting accounts for 22% of all electricity consumption. According to the US department of energy, widespread use of LED lighting could cut energy consumption due to lighting in half.

LEDs and compact fluorescents are the primary alternatives to the aging incandescent light bulb. Although compact fluorescents are currently less expensive than their LED counterparts, the price to produce white light LEDs is dropping rapidly. Compact fluorescents have been widely available for the last decade, but consumer adoption rates of compact fluorescents have been low. The light quality of compact fluorescents is typically poor and there is a significant delay when compact fluorescents are turned on. LEDs can provide a higher quality light, with no delay, and they should last about five times longer than compact fluorescents.

Although it will be a few years before LED prices will come down enough for the average consumer to purchase LED lighting solutions, businesses are already implementing LED lighting. Energy conservation and eco-friendly policies have become important issues for many large US businesses and LED lighting is another way for these companies to help conserve energy and show consumers that they are not heartless giants.

Financial results at Cree have been disappointing for the last few years. Although CREE has appeared poised for rapid growth for many years, results have often disappointed. In Cree’s most recent quarter, the company basically broke even, although the company officially posted earnings of $0.27 per share, the majority of these profits were due to a tax benefit. Over the past year investors have often expected faster growth and higher profits than Cree has been able to produce and shares of Cree have dropped from about $35 to $19. Although prior results have failed to live up to expectations, the growing demand for environmentally friendly LED ambient lighting solutions could transform Cree back into the growth stock it once was.

Recently, shares of Color Kinetics (Nasdaq: CLRK) have been on a tear. It appears that the rally in Color Kinetics is directly related to increased news about incandescent bulb legislation efforts. In the last four trading days shares of Color Kinetics have jumped from about $21 to $25.50. Although Color Kinetics should also be a beneficiary to the LED trend, at this point in time we feel that Cree has a more compelling valuation. As news about legislation banning incandescent bulbs continues and big businesses start to advertise their environmentally friendly efforts to switch to LED lighting, Cree has the potential for rapid appreciation similar to that recently seen in shares of Color Kinetics.

Cree has the added bonus of a relatively high percentage of shares held short. Considering the recent strength in the overall market, these short shares could help propel CREE higher with any positive news. Last months Wall Street Mayhem pick Gmarket surged 18% after earnings despite missing estimates on the top line. We believe this move was largely due to short covering. If the trend started by Color Kinetics this week continues, both Cree and Color Kinetics could benefit from short covering as news about LED lighting continues to grab the attention of the investing public.

The recent surge by Color Kinetics could be the start of increased investor interest in all things LED. Energy conservation is a trend that is showing no signs of slowing down. Solar companies like Trina Solar (NYSE: TSL) have been flying recently and we believe companies focusing on LEDs could be the next environmentally friendly energy conservation sector to receive serious investor interest.

Full Disclosure: Wall Street Mayhem is long CREE and CLRK

Update on Electro Opitcal Engineering (Nasdaq: EXFO)

• SELL EXFO near $6.48

Although Electro Optical Engineering appears to be out selling JDS Uniphase in optical test and measurement equipment based on JDS Uniphase’s latest quarterly report, there is too much carnage in this industry for us to be comfortable holding Electro Optical Engineering. We will look to get back in Electro Optical Engineering after the dust settles on JDS Uniphase.