Sensing A Big Move For InvenSense This Week

| About: InvenSense (INVN)

Executive Summary: InvenSense (NYSE:INVN) is a high-growth company at a reasonable price. The company reports earnings after the market close on Tuesday, July 30. A recent rise in short interest will result in a very lucrative short squeeze in the event of an upside surprise, and cushion any drop in price should earnings disappoint. I see at least two possible trades with asymmetric risk/reward as a result.

I have detailed the long-term buy thesis for InvenSense in the past and provided updated assessments on both the risk factors and growth catalysts for the stock. To summarize briefly, INVN is uniquely positioned to profit from society's gradual shift from mobile computing to wearable computing. Technological advances, from conductive nanofibers, which will allow for constant charging from body motion, to low-power displays make this trend almost inevitable, in my opinion. Wearable computing, will in turn usher in whole new wave sensor usage which goes far beyond smart-phones. Inclusion of InvenSense products in Google (NASDAQ:GOOG) Glass and other wearable devices is just the tip of the iceberg confirming the company's leadership in this trend.

Big Gains This Week?
The most recent bi-monthly short data has been released and whereas the short interest for most of the squeeze candidates I've been tracking has remained flat or decreased, INVN's has risen over 20% to over 26% of shorted float. This means that the short positions are easily at their highest in a year and more than 43% higher than the average of 9,454,677 shares held short over that time period. In addition, average daily share volume for the stock has fallen by over a third, which results in a near doubling of the days required to cover such positions. The squeeze potential of this stock is further validated by the short rebate rate more than doubling from its historical norm of .28%

Date Rate
25-JUL-13 0.61
24-JUL-13 0.61
23-JUL-13 0.61
22-JUL-13 0.61
21-JUL-13 0.61
20-JUL-13 0.61
19-JUL-13 0.40
18-JUL-13 0.40
17-JUL-13 0.28
16-JUL-13 0.28
Click to enlarge

All of this short positioning happened in the first 11 trading days of July, while Yahoo and several other news sources were mistakenly reporting that InvenSense would announce earnings on July 16th, just before options expiration, rather than on the 30th. This is a further possible reason for high short interest that could wind up being very squeezable.

Those needing a primer on the significance of these figures can refer to my previous article on short squeezes. InvenSense management has previously stated that they expect a shift to newer products to increase margins making estimates "conservative". Should earnings surprise to the upside, I expect the stock to eclipse its previous $20 high, for a 1 week gain of over 25%, or 1300% annualized.

A More Conservative Option

For more sophisticated investors who are very risk adverse, I believe that selling out of the money puts is a very viable alternative. The August puts at the $15 strike have sold for $0.70 per contract today. If not much changes for INVN, and the options do not wind up being exercised, that represents almost a 5% weekly gain (243% annualized). Should earnings disappoint, the high short interest will cushion the price as short sellers take profits. The stock would need to fall more than 5% from current prices in order for these puts to be exercised, and at worst, you effectively wind up purchasing for $14.30 per share, which would be at a forward P/E under 22. Furthermore, multiple upside catalysts for the resultant position would remain on the horizon. These include:

  • Resolution of their legal battles with STMicro (NYSE:STM), which have been going quite well.
  • Eventual adoption by Apple (NASDAQ:AAPL). This has been reported by many analysts to already have happened. Personally, I think that InvenSense will gain Apple as a customer when they introduce an iWatch, or similar device that would absolutely require best-in-class power consumption and size. Apple's modus operandi has long been to use cutting edge design and software to sell over-priced hardware, and InvenSense has wisely indicated an unwillingness to get roped into wrecking margin for volume, unlike many other Apple suppliers.
  • Use in new classes of products for sports, robotics, quantified self tracking, and even for animals, from vendors like Intel (NASDAQ:INTC), Samsung, Dell (NASDAQ:DELL), Jawbone and Nike (NYSE:NKE), as well as continued mobile device revenue.

In conclusion, there is every indication that this week's earnings report could represent an inflection point for INVN. I see downside risk as being fairly limited and, in the worst-case scenario, more conservative investors can use options to either book a substantial profit or pick up the stock at a good long-term entry point.

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.