For InvenSense, Short Interest Is Fuel In The Tank

| About: InvenSense (INVN)

InvenSense (NYSE:INVN) had nothing but good news this past week, and that could be very bad news for short sellers. On Wednesday, the company got a respite from its legal battle with STMicroelectronics (NYSE:STM) after a court agreed to stay the proceedings of a patent lawsuit while the United States Patent Office (USPTO) looks into the validity of those patents, as this excerpt from InvenSense's press release explains:

The USPTO has already determined that substantial questions of patentability exist for seven of the nine patents asserted by ST [STM], and USPTO office actions have already issued for four of the patent reexamination requests. The USPTO has rejected all of ST`s asserted claims in those office actions. In view of the pending reexaminations, the United States District Court for the Northern California agreed with InvenSense that it is unnecessary to currently proceed with the litigation initiated by ST and has granted InvenSense's motion to stay the litigation.

Then on Friday speculation that InvenSense's chips would find their way into Apple's (NASDAQ:AAPL) devices was renewed. Wedge Partners, a technology and media focused firm based in Denver, reportedly believes that the new iPhone 5 will use InvenSense's gyroscopes. If true, this would be a huge opportunity for InvenSense to gain the lion's share of the gyroscopic MEMS market. The company is already a supplier to big names in the mobile devices space including Google's (NASDAQ:GOOG) Nexus tablets, Amazon's (NASDAQ:AMZN) Kindles, and Samsung's (OTC:SSNLF) Galaxy phones, but a deal with Apple would be a new supplier relationship. Currently Apple uses competitor STMicro's chips.

InvenSense is gaining market share, consistently growing revenue, and had two positive catalysts last week. All of this spells trouble for its short sellers. And there are a lot of short sellers. Almost a quarter of InvenSense shares were sold short as of Feb. 14 and the stock price has declined almost 20% since. In my opinion, the recent sell-off combined with solid fundamentals and positive catalysts make InvenSense a compelling trading opportunity. Further Apple speculation could cause a rally that will force the shorts to cover and propel InvenSense considerably higher. The chart below shows InvenSense's recent stock performance.

(Click to enlarge)

I have a position in InvenSense at around $11.50 and am looking to cash out on a pop above $13. If the stock rallies and surpasses this price, I'll put a stop limit order at around that level to lock in a minimum return while I try to time the market and sell near the inflection point. Lots of volatility has made INVN a great stock to trade over the past year, but its solid and growing business also makes it a safer trade than most - if it goes wrong, the price will probably recover fairly quickly.

Disclosure: I am long INVN. 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.