Skullcandy: Perpetual Squeeze Coming

May.28.12 | About: Skullcandy (SKUL)

Skullcandy (NASDAQ:SKUL) has the unique distinction of having the largest short interest on the NASDAQ. Skullcandy has now beaten Wall Street's earning consensus for the four consecutive quarters it has been public. In the last quarter, institutional holdings increased from 50% of the outstanding shares to 69.18%. In the last six months, the short interest has gone from 5.1 million to 10.3 million. SKUL is being set up for the classic perpetual short squeeze.

The Perpetual Squeeze

I contend that as a stock approaches 100% institutional holding, while maintaining a large short interest, at some point it becomes an uncoverable position. I believe that if Skullcandy delivers on the next quarter, the professional shorts will no longer be able to prevent the perpetual squeeze that will propel this stock to new highs.

The Past Squeeze

Sourcefire Inc. (NASDAQ:FIRE) has a huge short position. The institutional holdings in Sourcefire are at 114% of the outstanding shares. The short interest is approximately 16%, and it would take 10 days to cover. The earnings announced on 2/12/2012 beat the Street's estimate and the stocked gapped up from about $34 to $37. The stock then traded straight to $50.

Ultimate Software Group, Inc. (NASDAQ:ULTI) put out its third quarter earnings and the stock gapped up. ULTI gapped up from about $52 to $56. Since then ULTI has traded as high of $72.29. Institutions at the time owned slightly over 100% of the outstanding shares. The short interest was approximately 14%, and it would take 10 days to cover. Incorporated (NASDAQ:PCLN) was a fad that was supposed to die in the dotcom bubble. Who could have guessed a reverse auction on the internet could transform the travel and hotel industry. Only the people that needed to find discounts truly realized the value of Priceline. Today, Priceline is worth $37 billion, and the shares have appreciated from $54 to $756 in the last five years. With current institutional holdings of 98%, Priceline has been in a perpetual squeeze for years.

Lululemon Athletica (NASDAQ:LULU) is a sports clothing brand that specializes 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 t-shirts. Lululemon has branched into selling other product lines, and has become the highly valued brand it is today. With a current institutional hold of 93% and a short interest of approximately 11% of the float, LULU has been in a perpetual squeeze for years.

The Skullcandy Story

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 its 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. It is enhancing its brand through a runway model series, extending its brand's reach through the X-games, NBA, Dwyane Wade, Derrick Rose, Kevin Durant and Kate Upton. Scullcandy has taken a page out Nike's (NYSE:NKE) playbook on successful co-brand marketing.

Skullcandy released its first quarter numbers and the professional shorts immediately pounded the stock down from $17.50 to $11.95 in order to create the illusion that Skullcandy's quarter was actually bad. After the short interest data was published for the last month, it has become obvious that short selling has been the predominant reason for the rapid price depreciation. Now that the quarterly institutional holdings have been reported it has really became obvious that professional shorts have created such a large short position it would be practically impossible to cover this position without driving the share price up. Here are the reasons I believe Skullcandy is set to touch new highs in the short term:

1. Skullcandy has 27 million shares outstanding, of which there are 10.3 million shares short. Institutions own 18.9 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 40.1 million shares, 13.4 million shares more than what is currently outstanding. The short interest is approximately 96% of the float.

2. Skullcandy is followed by eight 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 $300 million.

4. There have been two recent insiders buying $500K of the company's stock.

5. Skullcandy has beaten the consensus earnings estimate in the four quarters it has 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's products are sold through established retail chains, such as Apple (NASDAQ:AAPL) and Target (NYSE:TGT) stores, as well as many other specialty and big box retailers.

8. Total institutional holdings increased by 4.4 million shares in the last reported quarter.

9. The PEG ratio is .52.

10. The top 14 Institutions added to their holdings last quarter.

11. For more information on SKUL.

Where Skullcandy is headed: Comparing ratios

Monster Energy (NASDAQ:MNST) , with similar projected growth rates, trades at about $71, with 2011 earnings of 1.54 per share. MSNT trades at 43 times this year's earnings, and 35 times next year's projected earnings with a PEG ratio of 2.03.

LuLulemon Athletica has a slightly faster growth rate. Its stock trades at about $72, with 2011 earnings of 1.26. LULU trades at 56 times this year's earnings and 44 times 2012 projected earnings with a PEG ratio of 1.51.

Skullcandy trades at about $13.28, with 2011 earnings of 1.00 per share. SKUL trades at 13 times this year's earnings, and 11 times next year's earnings with a PEG ratio of .52.


With projected 2013 earnings of 1.43 per share, Skullcandy is projected to earn .16 per share more than LuLulemon Athetica earned this year, with LULU trading at 72.00 per share. MSNT and LULU respectively trade at 35 and 44 times next year's earnings; SKUL trades at 8 times next year's 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 LULU, SKUL.