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I think the professional shorts are about to take a trip down marketing lane, and it's not going to be a very rewarding experience. Bold, and having the intestinal fortitude to short 85% or more of the float of Skullcandy (SKUL), will turn out to be a disaster of investment for those who have bet against Skullcandy's successful brand. There is a long list of marketing-driven niche brands whose heavily shorted stocks have become HUGE winners for their long term and loyal shareholders. Two of the most recent that come to mine are Lululemon Athletica (LULU) and Monster Energy (MNST). Like Skullcandy, both of these companies attracted ridiculous short interest, mainly because the professional shorts never grasped the value of their brand. Early investors in both these companies made 10-20 times their original investment if they were lucky enough to discover these companies when they first went public. To this day, the shorts are still rationalizing why they were right, while losing 1000% or more on their orIginal short positions.

Previous Short Disasters

LuLulemon Athletica (LULU) is a sports clothing brand that specialized 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 dollar t-shirts. LuLulemon has branched into selling other product lines, and has become the highly valued brand it is today.

Monster Energy (MNST) has captured market share in the energy drink market. The shorts never believed Monster Drinks could compete and take market share from Red Bull. More importantly, how could any small company compete with Pepsi or Coca Cola? Monster developed a successful marketing campaign centered around sporting venues, and now all the major drink companies realize how big the energy drink market is.

The Future Of Headphones

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 their market driver is mobile device industry which is booming. The global accessory market in 2010 was $26.5 billion and is growing to $50 billion in 2015. Skullcandy is co-branding with sport leagues, sport teams, and athletes. Skullcandy is enhancing their brand through a runway model series. Extending their brands reach through the X-games, NBA, Dwyane Wade, Derrick Rose, Kevin Durant and Kate Upton. Scullcandy has taken a page out Nike's (NKE) playbook on successful co-brand marketing.

Here are the reasons why I believe Skullcandy is a great investment.

1. Skullcandy has 27 million shares outstanding, of which there are 8.7 million shares short. Institutions own 13.3 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 34.2 million shares, 7.2 million shares more than what is currently outstanding. The short interest is approximately 60% of the float.

2. Skullcandy is followed by 8 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 $280 million.

4. There has been recent insider buying in the company's stock.

5. Skullcandy has beaten the consensus earnings estimate in the 3 quarters they have 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 products are sold through established retail chains, such as Apple Stores (AAPL) and Target (TGT), as well as many other specialty and big box retailers.

8. Total institutional holdings increased by 2 million shares last reported quarter.

9. The PEG ratio is .62

Comparing Ratios

Monster Energy, with similar projected growth rates, trades at about $64, with 2011 earnings of 1.54 per share. MSNT trades at 40 times this years earnings, 33 times next years projected earnings with a PEG ratio of 2.03.

LuLulemon Athletica has a slightly faster growth rate. Its stock trades at about $76, with 2011 earnings of 1.26. LULU trades at 57 times this years earnings and 47 times 2012 projected earnings with a PEG ratio of 1.51.

Skullcandy trades at about $16, with 2011 earnings of 1.00 per share. SKUL trades at 16 times this years earnings, 14 times next years earnings with a PEG ratio of .62.

Conclusion

With projected 2013 earnings of 1.43 per share, Skullcandy is projected to to earn .16 per share more than LuLulemon Athetica earned this year, with LULU trading at 77.00 per share. MSNT and LULU respectively trade at 33 and 47 times next years earnings; SKUL trades at 14 times next years earnings. With the short interest moving towards 100% of the float, and institutional ownership increasing, it will soon be obvious that the market will reward Skullcandy's brand with similar multiplies. You do the math!

Disclosure: I am long SKUL.

Source: Skullcandy Is All About The Brand