Skullcandy (SKUL) Becomes the Most Heavily Shorted Stock on the NASDAQ

Headphone and smartphone accessory maker Skullcandy (SKUL: Charts, News) recently received the dubious distinction of being the most heavily shorted stock on the NASDAQ. While this should be discouraging news for most companies, an increasing number of analysts are turning bullish on the stock, believing that the stock is set to rally strongly on the inevitable short squeeze.

Skullcandy has beat Wall Street estimates for the past four quarters. Meanwhile, institutional ownership of the stock has climbed from 50% to 69.18% in a single quarter, while short interest has risen from 5.1 million to 10.3 million. These unusual movements in the stock, combined with the company's strong earnings history, make Skullcandy an increasingly attractive contrarian play. Shares have declined nearly 34% since their market debut in July 2011. The stock has risen 6% in 2012.

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Like its high successful industry peer Zagg (ZAGG: Charts, News), Skullcandy is dependent on the booming smartphone and tablet industries. The global accessory market for these devices was worth $26.5 billion in 2010. Analysts project this market to grow to $50 billion by 2015. Skullcandy has focused heavily on appealing to American sports fans with its branded products. Many analysts believe that Skullcandy is following Nike's (NKE: Charts, News) example by attracting top name endorsements, including Dwyane Wade, Kevin Durant and Derrick Rose. The company has also increased its female appeal with a "runway model" series featuring Kate Upton. Skullcandy has also been fast to refresh its headphone product lines. Two new styles planned for this quarter include the redesigned Hesh style and the Cassette style headphones, the latter of which is foldable with removable speakers. Skullcandy products are found in Target (TGT: Charts, News), Apple (AAPL: Charts, News) Stores, and other major retailers.

During the first quarter, Skullcandy posted earnings of 4 cents per share on revenue of $53 million. Analysts had projected earnings of 4 cents per share on revenue of $44 million. Although this matched profit expectations and beat revenue forecasts, professional short sellers quickly stressed the fact that this was a decrease from the 5 cents per share it posted a year earlier, and that gross margins slid from 50.8% to 48.8%. Excluding lawsuit related expenses, however, Skullcandy earned 5 cents per share, matching prior year earnings. Despite the company's solid numbers, short sellers managed to drive the stock down from $17.50 to $11.95 after a single month.

With 10.3 million out of 27 million outstanding shares being sold short, Skullcandy shares may be set for a big rally soon. All eight analysts who cover the company have a "buy" rating on shares, with a price target between $22 and $28, far above the $13 per share it trades for today. Meanwhile, institutions own 18.9 million shares, while other major stockholders hold 10.2 million shares. Revenue has steadily risen over the past three years - $118 million in 2009, $160.5 million in 2010, $232.4 million in 2011, and a projected $300 million in 2012. The company earned $1.00 per share in 2011, and projects earnings between $1.15 to $1.20 per share in 2012. In 2013 it anticipates earnings of $1.43. In the previous quarter, 14 institutions purchased an additional 4.4 million shares. To top of all this bullish sentiment, two insiders recently purchased over $500,000 in company stock.

Many analysts have compared Skullcandy's steep profit and sales growth to Lululemon Athletica's (LULU: Charts, News) strong performance. While Lululemon trades at 44 times forward earnings, Skullcandy trades at a mere 8. With a 5-year PEG ratio of 9.3, Skullcandy's shares are significantly cheaper than Lululemon's. At current prices, Skullcandy's downside is fairly limited, and brave traders may be able to take advantage of the upcoming reversal.

Other News About SKUL

Skullcandy: Perpetual Squeeze Coming Skullcandy shares are poised to rally on a massive short squeeze.
Interview With Skullcandy CEO Jeremy Andrus Skullcandy's CEO discusses the company's future.

Other Stocks in the News

McDonald's sells debt to fund China expansion McDonald's plays catch-up with Yum! Brands in China.
4 ways Apple has changed under new CEO Can Tim Cook live up to the legend of Steve Jobs?

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Published on May 29, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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