Why I Went Long Skullcandy

| About: Skullcandy (SKUL)

It appears that shares of audio accessory maker Skullcandy Inc. (NASDAQ:SKUL) are prepared to bounce back from their 52-week low of $5.98 on February 8, 2013. Since April of 2012 the stock has taken a steady decline due to multiple factors.

1. September 2012 - Apple Inc. (NASDAQ:AAPL) announced new earphones directly competing with Skullcandy. Morgan Stanley analyst Jay Sole then downgraded SKUL based on declining market share due to competition.

2. November 2012 - Skullcandy lowers its profit outlook to approximately $1 per share. The news drives shares lower on concerns over the company's growth prospects.

3. January 2013 - Jefferies analyst Randal Konik downgrades the company. He cited revenue pressures from several competitors in the market.

4. February 2013 - Skullcandy CEO Jeremy Andrus steps down to take a position with a private investment firm.

I feel there are many reasons to be optimistic about the company's future share price.

1. The company is preparing to release earnings after the bell on March 7, 2013. Skullcandy has a history of surprisingly positive quarters and has done a great job of dampening analyst estimates.

2. SKUL is currently valued at a significant discount to the S&P 500 index based on Trailing P/E and Forward P/E.

3. The company has reported with the SEC its plans to buy back up to $28 million in outstanding common stock. This could cause a short squeeze and drive the stock price significantly higher fairly quickly.

4. The company at this reduced value is a takeover target. Rumored companies include Sony Corporation (NYSE:SNE), Bose Corporation, or Apple Inc.

The above-listed factors have led me to believe that Skullcandy's stock is undervalued. It appears poised to make a significant move higher from its recent closing price of $6.49.

Disclosure: I am long SKUL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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