In a quarter where shareholders saw Skullcandy's (SKUL) stock drop from $17.24 to $12.15 a share, proceeding first quarter numbers, it is now obvious that the entire price decline was caused by an incredible amount of short selling. In the third quarter we have seen the stock again go over $16.50 and I can only conclude that institutions have added another 10 or 15 percent to their holdings. With institutions now holding at least 21.1 of the 26.5 million shares, and a short position of 11.7 million shares, it can't be much longer before that short squeeze is inevitable. I can't help but wonder, how crazy are these shorts?
Kamikaze in Action
In the second quarter, as 14 of the top 15 fund holders were buying more stock or holding their positions, the professional shorts were busy selling another 25% of the company they don't own. Clearly with these shorts willing to short 78% of the float, we are looking at the potential for a historical short squeeze. The last reported institutional holdings of 21.174 million shares and the insider holdings of 10.1 million shares add up to 31.274 million shares in a company having only 26.5 million shares outstanding. There are only 5 million shares not held by institutions, and the declared short position is 11.7 million shares. With Scullcandy projected to make $0.87 in the next two quarters, and sitting right at the breakout price, I say grab your popcorn and get ready for the roller coaster ride.
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. 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 the brand, I suggest they check out Nike and Lululemon Athletica. 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:
"Net sales in the second quarter of 2012 increased 38.2% to $72.4 million from $52.4 million in the same quarter of the prior year. In the second quarter of 2012, domestic net sales increased 34.1% to $50.6 million, international net sales increased 59.9% to $16.5 million and online net sales increased 22.8% to $5.3 million.
Gross profit in the second quarter of 2012 increased 33.1% to $35.7 million from $26.8 million in the same quarter of the prior year. Gross profit as a percentage of net sales, or gross margin, was 49.2% in the second quarter of 2012 compared to 51.1% in the second quarter of 2011. The decrease in gross margin is mostly due to a shift in sales mix to higher price point products with lower gross margin structures."
- 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 5 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 for SKUL is $0.71.
- For more information on SKUL.
Mitek Systems Another Short Play
The mobile revolution has arrived, and camera capture technology could be the most significant technology development of the decade. While most investors are familiar with mobile check deposit (RDC) now being launched at hundreds of banks, it is hard to grasp just how transformational RDC is.
Mitek Systems (MITK) has now licensed 25 of the 40 largest banks to use RDC. While RDC is currently the most utilized license for mobile data capture, it may not be the largest potential market. With 13 patents Mitek Systems is well positioned to pioneer significant parts of the industry. There are equally large markets for mobile capture technology, but the applications are still in the infancy or beta stage of development.
The mobile imaging market is being driven by irreversible trends. Most of the phones being sold today are smartphones that have sophisticated cameras. The pixel clarity improves with each new generation. As the mobile camera improves, the capture rate of data improves. One company stands poised to storm the market and capitalize on this technology. Mitek has signed licenses with 408 banks, including 25 0f the 40 largest banks. Bank of America (BAC) and Wells Fargo (WFC) just launched RDC, licensed with Mitek's technology. According to a recent study by Javelin, 58 percent of financial institutions plan to deploy mobile RDC over the next year. The research report published by AlixPartners calls for 1.5 billion mobile deposits by 2014.
- The current short position in MITK is 25% of the float increasing from 5 million shares to 6.5 million in the last 6 weeks.
- Mitek Systems has an application to take a picture of your drivers' license and insurance card and get an insurance quote.
- Mitek Systems has $15 million in the bank, alleviating the need for additional financing.
- Mitek Systems' Bill Pay (pdf) was named best of show at Finovat Spring 2011.
- Mitek Systems has developed a point-and-shoot application to transfer credit card balances to springboard into new markets.
- Mitek Systems has a proven and experienced management team.
- The current short position in MITK is 6.5 million shares and growing; large short positions can be quite difficult to cover, often resulting in a short squeeze when market conditions turn.
- Art Samberg just filed a 13g and now owns over 5% of Mitek. He is one of the smartest technology investors ever to work on Wall Street.
- For more Information on Mitek Systems.
The USAA Lawsuit
The shorts began getting into the stock when it was around $11, and the lawsuit with USAA collapsed the stock, shaving $200 million off the valuation of Mitek Systems. The suit stems from USAA questioning Mitek Systems development of the patents. USSA has questioned the patents and the payment they owe Mitek Systems and Mitek has counter sued for damages. This lawsuit has not deterred other banks from licensing RDC from Mitek but should be considered when investing in the stock. The fact the company has been issued 13 patents and licensed an additional 93 banks for RDC last quarter satisfied my due diligence.
Look at the Past for Squeezes and Dream
Priceline (PCLN) was a fad that was supposed to die in the dot com 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 5 years.
Lululemon Athletica (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.
Monster Energy (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 or Coca Cola? 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.
There is huge short position in SKUL and MITK and enormous markets to participate in. Both of these companies' growth is being driven by the smartphone revolution, and i don't see this revolution ending any time soon. Most investors dream of participating in that elusive short squeeze. Imagine the thought of participating in two.