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Shareholders in Apple (AAPL) have ridden the Smartphone revolution for 5 years. In spite of Apple announcing blowout quarters, based on iPhone and iPad sales, the professional shorts keep shorting two stocks that could soon announce some very impressive numbers. I have no idea why the professional shorts are so entrenched in these stocks, but the day of reckoning may be coming. Both companies are industry leaders in their market segments, and have a lot of shelf space at big box retailers where many of these smart phones are sold. This should indicate sustainable growth for years to come.

Skullcandy, Inc. (SKUL)

Skullcandy is a lifestyle products company selling distinct audio branded headphones and other smart phone accessories. Skullcandy brings color, character, and performance to what has been a monochromatic space. Co-branding products with the NBA and other sporting venues. It also recently announced a line that links with runway model Kate Upton.

While the shorts have made a point of dismissing the value of their brand, I suggest they check out Nike (NKE) and Lululemon Athletica (LULU). Neither company designs and manufactures a product that can't be copied and reproduced; however, each company is a master at marketing their product and placing it in the correct channels to maximize revenue. Skullcandy has the same type of branding appeal and with the massive short interest is poised for a classic short squeeze.

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

  • Skullcandy has 27 million shares outstanding, of which there are 11.55 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 40.55 million shares, 13.65 million shares more than what is currently outstanding. The short interest is approximately 76% of the float.
  • Skullcandy is followed by 11 analysts all having buy recommendations with a consensus price per share estimate of $22 and a high of $33.
  • The last three years' revenue was $118 million, $160.5 million, $232.4 million, and projected revenues for 2012 are $280 million.
  • There has been recent insider buying in the company's stock.
  • Skullcandy has beaten the consensus earnings estimate in the 4 quarters they have been public.
  • 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.
  • The PEG ratio is .61
  • For more info on SKUL

ZAGG, Inc. (ZAGG)

Zagg designs and manufactures accessories for the smartphone and tablet market. Zagg is the leading smartphone accessory player in the U.S. It sells the InvisibleShield screen protector for Apple and Android products. Zagg holds the U.S. patent for protecting electronics with film. ZAGG's core product is the Invisible Shield screen protector.

ZAGG owns iFrogz, a major case and accessory seller. ZAGG also sells keyboard cases for the tablet market and has partnered with Logitech (LOGI) selling co-branded iPad keyboard cases throughout the Apple Stores.

Most of these products are sold through Big Box retailers like Best Buy (BBY), Wal-Mart (WMT) and smartphone retailers such as AT&T (T) and through the Apple Stores.

ZAGG also holds 47% interest in HZO, which is a venture-capital backed company that designs a nanotechnology coating that protects devices from damage by water and moisture. That's right - HZO is making it possible to waterproof your phone.

What follows here are the reasons why I believe ZAGG is a great investment:

  • There are 31 million Shares outstanding, of which there are, 7.5 million shares short. Institutions own 11.4 million shares, and insiders own 10.7 million shares.
  • The last three years' revenue was $38.1 million, $76.1 million and $179.1 million and projected revenue in 2012 exceeding $250 million.
  • There are four analysts following the company all having buy recommendations with a consensus price per share estimate of $21.
  • Analysts are projecting 2012 earnings of $0.80 versus $0.63 in 2011.
  • ZAGG has met or beat the street estimate for seven quarters in a row.
  • The current short position is 42.29% of the float according to ShortSqueeze.com.
  • ZAGG has a PEG ratio of .53.

Other Apple Alternate Plays

Baidu (BIDU) is the owner of the most widely used search engine in China. Apple will only increase that market share, as more devices are capable of accessing the internet. Baidu shares have gone from a low in December 2011 of approximately $110 to a high of over $150 in April 2012.

Cirrus Logic (CRUS) is a developer of integrated circuits for use in the audio and energy segments. It is a major supplier of Apple circuit boards. Cirrus Logic's shares have gone from a low of $13 in August to a high of $28 plus in June 2012.

Broadcom Corp (BRCM) is a global leader in semiconductor solutions for wired and wireless communications. It is a Tier 1 supplier to Apple. Broadcom"s stock has gone from f$27.50 in December 2011 to a high of $39 in April 2012.

Qualcom Inc. (QCOM) designs, develops, manufactures, digital telecommunications products and services. It is a Tier 1 supplier to Apple. Qualcom'stock has gone from $45 in August 2011 to a high of $68 in March 2012.

Conclusion

There are a lot of market segments one might consider overvalued and consider shorting, but companies making accessories for mobile devices?

Investors dream of investing in the elusive short squeeze. These companies offer the opportunity to do it.

Source: 2 Heavily Shorted Earning Momentum Micro Caps Set To Leverage Smartphone Sales