Ten LED Stocks, and a Wildcard

Tom Konrad CFA

Clean Edge says the phase-out of incandescent light bulbs is opening the way for low-cost LEDs.  These are the stocks to know.

Federal regulations are flipping the switch on our love affair with incandescent light bulbs.  Research firm Clean Edge‘s just-released Clean Energy Trends 2011 says this opens the way for a clean energy trend to watch: With compact-fluorescent light (CFL) bulbs the only legal competition in much of the world, Light-Emitting Diode (LED) bulbs need only the arrival of an affordable replacement for the standard 60 watt bulb in order to be met with “an immediate rush of policy-driven demand.”

What is an “affordable” 60 watt replacement? Lighting Science Group (LSCG.OB) began providing a 40-watt replacement LED bulb through Home Depot for $20 in May.  Netherlands based Lemnis offers a 60-watt dimmable replacement for $25 online.  That’s still high.  With CFLs selling for $3 or less each, the many advantages of LEDs (instant on, no mercury, cold tolerance, dimmability, and slightly better energy efficiency) are not enough to overcome the high first cost barrier.  Clean Edge quotes Lemnis CEO Warner Phillips, who thinks large chunks of the market will start shifting at $15, and the entire mass market will start to shift at the psychologically critical $10 price point.  He expects to see these prices in the next one to three years.  Lighting giant Philips (PHG) is predicting that LEDs will take 50% of the lighting market by 2015.

One to three years is about the right time frame for a stock market investment based on predicted future trends.  Getting in sooner often means your money is tied up longer than it needs to be, while investors who wait too long often find that others have bought first and already driven up the stock price.  I personally think the $10 LED bulb that can truly produce as much light as a 60 watt incandescent will take much closer to three years than one, and 50% by 2015 seems a bit optimistic to me as well.  I’m not rushing to get in, but I think the time to get in will be soon. 

Here are the stocks I’ll be considering:

• Lighting Science Group (LSCG.OB), mentioned above, has the advantage of selling retail products, and so may also have the advantage of capturing retail investor attention quickly.  They also retrofitted every Starbucks in California with LEDs last year.
• Aixtron AG (AIXG) produces the equipment used for creating LEDs, meaning that the company’s sales should lead those of LED bulbs.
• Cree Inc (CREE) was a pioneer with early high-efficiency white LEDs.  Recently the company has been struggling with strong competition from Asian semiconductor manufacturers, but some observers think the stock has fallen far enough to look attractive again.
• Epistar Corporation (2448.TW), is a Taiwan based manufacturer of LED chips and wafers that partners with customer to produce LEDs customized to their specific applications..
• Neo-Neon Holdings (1868.hk) calls itself the world’s largest traditional and LED decorative lighting manufacturer, and considers itself a front-runner in white LED manufacturing.
• Nexxus Lighting (NEXS) is an LED integrator producing LED fixtures, and other lighting products for a wide range of specialized applications.
• Philips (PHG), a diversified electronics giant with a strong presence in LEDs and efficient lighting which they augmented when they bought LED company Color Kinetics in 2007.
• Rubicon Technology Inc (RBCN) makes monocrystalline sapphire and other crystalline products for light-emitting diodes and other applications.
• Veeco Instruments Inc. (VECO) produces customized LED and solar process equipment.
• Universal Display Corp. (PANL) makes organic light emitting diodes (OLEDs) for the display and lighting industries.  OLEDs are much less expensive than standard LEDs, although they cannot yet acheive comparable brightness.  We’re unlikely to see OLED 60w bulb replacements any time soon, but they are behind the most energy efficienct TVs and monitors.  I’m writing this article using an [O]LED display from LG which I believe contains PANL’s technology.  It’s amazingly thin, and has great performance in terms of sharpness, response time, viewing angle, and contrast.
• Vu1 (VUOC.OB) produces not LEDs, but a rival highly-efficient, mercury free lighting technology called Electron Stimulated Luminescence.  I include them as a wild card, since they also stand to benefit from the phase-out of the incandescent bulb.

Which are the best buys?  If you’re betting on a rapid take off of LED manufacturing, I think the equipment suppliers are probably the most attractive stocks in this sector, so take a look at Aixtron and Veeco.

UPDATE: I just came across a new LED company that I missed.  SemiLEDs Corporation (LEDS) went public last December.  The company makes blue, green, and ultraviolet LED chips.

DISCLOSURE: No Positions. 

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