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Jeffco is out positive on on USANA Health (NASDAQ:USNA) saying operating momentum should continue as Average Active Associate growth has been accelerating recently. Therefore, they believe upside is possible to 4Q results, which could lead to a further short squeeze on the shares. In addition the firm believes mgt has been conservative in its 2008E outlook, which may be revised upward.

Gross margins should continue to expand nicely with the disposition of the lower-margin contract mfg business. However, SG&A has been up as a % of sales due to expansion of its infrastructure to support recent growth and due to added legal costs as a result of 3rd party allegations which mgt deems defamatory.

Firm expects management to update its outlook for 2008E. In its original outlook, co suggested 2008E sales and EPS would each grow +10-13%, which they believe to be conservative, particularly in light of the acceleration in Average Actives and the currency tailwind, particularly from the Canadian and Australian dollars. Combined, those markets accounts for almost 1/3 of sales and are currently up double digits vs the US$. Jeffco's EPS forecast for 2008E is $3.10, up +16.7% and above the upper end of mgt's implied 2008E outlook of $2.93-$3.03, as is consensus of $3.04.

USNA is still among the most shorted stocks with 7.0 mil shares still short as of January 15th, which is almost 100% of the free float.

Reiterates Buy and $56 target.

Notablecalls: Worth watching I think, as USNA can be an explosive mover. These comments may put some fire under the shorts.

Source: Expecting a Short Squeeze in USANA Health