Comparing The PEG Ratio Of 6 Heavily Shorted Earning Momentum Stocks

Jun.10.12 | About: Skullcandy (SKUL)

The following is a list of stocks that have large short interest with yearly earning momentum. The six stocks all have institutional ownership of at least 69% and most have been in a perpetual short squeeze for years. It is my contention that the high PEG ratios are a result of the larger short interest and the high institutional ownership of earning momentum stocks. When you find a low PEG ratio stock with a huge short position, if it is under institutional accumulation, it will become a great short squeeze candidate.

Short Selling Nightmares

Nike (NYSE:NKE) is a company that had a lot of skeptical shorts early on. The shorts bet heavily against Nike's ability to compete with the established sport shoe brands. Phil Knight had a vision of co-branding through top athletes and sponsored sporting events. He understood the influence of these idealized athletes had among the market Nike was trying to reach. As of Friday, Nike is worth 40 billion, trading at 105.51 with a PEG ratio of 1.57.

Monster Energy (NASDAQ: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 (NYSE:PEP) or Coca Cola (NYSE:KO)? 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. As of Friday, MSNT trades at 72.83 with a PEG ratio of 2.23.

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 stock gapped up from about $34 to $37. The stock then traded straight to $50. Today FIRE is trading at 49.83 with a PEG ratio of 7.16.

Ultimate Software Group, Inc. (NASDAQ:ULTI) put out its third quarter earnings and the stock 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. As of Friday, ULTI trades at 81.71 and has a PEG ratio of 5.45.

Priceline.com 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. As of Friday, PCLN trades at 619.83 with a PEG ratio of .96.

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. As of Friday, LULU trades at 70.66 with a PEG ratio of 1.45.

The Skullcandy Story -- a Squeeze in Waiting

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.

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 the 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, Derrick Rose, Kevin Durant and Kate Upton. Scullcandy has taken a page out of Nike's playbook on successful co-brand marketing.

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 .55.

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

11. For more information on SKUL.

12. Read a interview with the CEO.

Where Skullcandy is headed: Comparing ratios

Monster Energy -- with similar projected growth rates-- trades at about $73, 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.

Luncheon Athletica has a slightly faster growth rate. Its stock trades at about $64, with 2011 earnings of 1.26. LULU trades at 46 times this year's earnings and 40 times 2012 projected earnings with a PEG ratio of 1.35.

Skullcandy trades at about $14.00, 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 .55.

Conclusion

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 64.00 per share. MSNT and LULU respectively trade at 35 and 40 times next year's earnings; SKUL trades at 10 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.