Heelys, Inc.: Ready For a Bounce

Oct.16.07 | About: Heelys, Inc. (HLYS)

When I first looked at Heelys (NASDAQ:HLYS) stock it was trading as high as $40+ after the IPO. I remember feeling it was priced for perfection. Sure enough this fast growing company ran into some inventory issues which resulted in lowered earnings estimates and the stock plummeted several weeks ago.

I think the stock plunge down to just under $8 per share is as much as an over reaction as the price jumping to over $40 earlier this year. Many investors believe that Heelys is just a fad that will diminish quickly but I think the growth is far from over. Roller skates, snowboards and other products were thought of as fads when they first came out, but the market for them endures. Heelys has plenty of opportunity to expand overseas and they remain very popular in the U.S. It has been reported that Angelina Jolie will be wearing Heelys in her new movie "Wanted" coming out next year and I expect this to help keep demand for the shoes high.

Heelys market cap is currently equal to about one year of sales, and it has no long term debt. With the current stock price of about $8 per share it is trading for about 6 times earnings. I believe Heelys will work out the inventory issues and continue to grow at a healthy rate. Anyone who has run a fast growing company knows that it's easy to miss inventory projections and have some growing pains along the way.

Short term thinkers, short sellers and tax loss selling have all punished this stock, which is why I believe there is a great opportunity to pick up some shares of this company now. I believe the stock is poised to trade higher in the next 3-6 months once the tax loss selling is over and a good Christmas season helps to work out the inventory issue. At this price it's even a possibility that another major shoe company would want to buy Heelys…..

I don't want to hold Heelys forever, but at this price, I expect a nice bounce. As always, please do your own due diligence and verify the numbers before investing in any stock to make sure it's right for you.

Disclosure: Author has a long position in HLYS