Saturday, July 7, 2012

Skullcandy: 43% Of The Outstanding Shares Short And The Clock Is Ticking

Skullcandy (SKUL) represents the poster child for aggressive, if not abusive shorting in today's stock market. Going public at $20 and beating 4 consecutive consensus earnings estimates, has lead to nothing but mounting losses for IPO investors that believed the Scullcandy story. In spite of credible institutions, Fidelity, Blackrock, Soros Asset Management and over 100 other institutions buying approximately 70% of the outstanding shares, the professional shorts have shorted this stock like they are going out of business. While 9 credible Wall Street analysts are calling for a consensus share price of $22 dollars, shorts have sold an additional 1.5 million shares in the last month with an average cost of $13 or lower. The short position has ballooned to 11.72 million or approximately 43% of all of the outstanding stock. This short position represents 33 days to cover, based on the last two weeks of volume. If the analysts estimates are correct, Scullcandy will make $1.11 a share in the next 3 quarters.
When the Shorts lose they lose big
Chipotle Mexican Grill (CMG) Is a stock that is 95% institutional held. The high short interest was 3.7 million shares and is currently 2.3 million shares. If you need evidence how devastating the losses can be to professional shorts, look at the 3 year share appreciation for CMG. CMG has gone from $75 to a high of $440. CMG has a PEG ratio of 2.08. Inc. (PCLN) was a fad that was supposed to die in the dotcom bubble. Who could have guessed that a reverse auction travel portal could have created such loses for the non believing professional shorts. In 2002 this stock was trading for approximately $4 and now is currently $664. This is what happens to a stock when a company performs and you have an entrenched short community willing to go down in flames.
Sourcefire Inc. (FIRE) has a huge short position. The institutional holdings in Sourcefire are at 114% of the outstanding shares. The short interest is approximately 16%, and it would take 10 days to cover. The earnings announced on 2/12/2012 beat the Street's estimate and the stocked gapped up from about $34 to $37. The stock then traded straight to $50.
Ultimate Software Group, Inc. (ULTI) put out its third quarter earnings and the stock gapped up. ULTI gapped up from about $52 to $56. Since then ULTI has traded as high of $72.29. Institutions at the time owned slightly over 100% of the outstanding shares. The short interest was approximately 14%, and it would take 10 days to cover.
Lululemon Athletica (LULU) is a sports clothing brand that specializes in yoga clothing. The shorts failed to grasp how large the yoga market would become. The upscale demographics of the yoga clothing buyer destroyed the rationale for shorting this stock. To this day, shorts are still wondering who is buying these $60 t-shirts. Lululemon has branched into selling other product lines, and has become the highly valued brand it is today. With a current institutional hold of 93% and a short interest of approximately 11% of the float, LULU has been in a perpetual squeeze for years.
The Skullcandy Story -- a Squeeze in Waiting
Skullcandy has the unique distinction of having the largest short interest on the NASDAQ. Skullcandy has now beaten Wall Street's earning consensus for the four consecutive quarters it has been public. In the last quarter, institutional holdings increased from 50% of the outstanding shares to 69.18%. In the last six months, the short interest has gone from 5.1 million to 11.7 million. SKUL is being set up for the classic perpetual short squeeze.
Skullcandy is a lifestyle products company, selling distinct audio branded headphones and other smartphone accessories. Skullcandy brings color, character and performance to what has been a monochromatic space. Like Lululemon Athletica and Monster Energy, Skullcandy will ultimately succeed because its market driver is the mobile device industry, which is booming. The global accessory market in 2010 was $26.5 billion and isgrowing to $50 billion in 2015.
Skullcandy is co-branding with sport leagues, sport teams, and athletes. It is enhancing its brand through a runway model series, extending its brand's reach through the X-games, NBA, Derrick Rose, Kevin Durant and Kate Upton. Scullcandy has taken a page out of Nike's (NKE) playbook on successful co-brand marketing.
1. Skullcandy has 27 million shares outstanding, of which there are 11.7 million shares short. Institutions own 18.9 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 41.5 million shares, 14.8 million shares more than what is currently outstanding. The short interest is approximately 76% of the float.
2. Skullcandy is followed by eight analysts, all having buy recommendations, with a consensus price per share estimate of $22 and a high of $28.
3. The last three years' revenues were $118 million, $160.5 million, $232.4 million, and projected revenues for 2012 are $300 million.
4. There have been two recent insiders buying $500K of the company's stock.
5. Skullcandy has beaten the consensus earnings estimate in the four quarters it has been public.
6. Earnings were $1.00 per share in 2011 and are projected between $1.15 and $1.20 a share in 2012. Earnings are projected at $1.43 in 2013.
7. Skullcandy's products are sold through established retail chains, such as Apple (AAPL) and Target (TGT) stores, as well as many other specialty and big box retailers.
8. Total institutional holdings increased by 4.4 million shares in the last reported quarter.
9. The PEG ratio is .55.
10. The top 14 Institutions added SKUL to their holdings last quarter.
Tick Tock
Fuelled by yearly earning momentum, it is my contention that the next 2 quarters of earnings will bring the day of reckoning to the entrenched short sellers. If Skullcandy meets the consensus estimates in the next 2 quarters we should be looking at one of the historical short squeezes. This squeeze should propel shares of SKUL to unfathomable levels. With SKUL having over 40% of the outstanding shares short, a 50 PE on next year's $1.43 estimate may look cheap. When this squeeze opportunity is widely recognized by Wall Street sharks, and an investing public that loathe these professional shorts, could we be looking at the second coming of Volkswagen ?

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