You can say all you want about the previous management at Zagg, Inc. (ZAGG), but you have to give them credit for building one of the fastest growing companies on Nasdaq. Robert Peterson may have been one of the most controversial CEOs, but few have been better visionaries when it came to actually building sales for a growth company. Clearly, the professional shorts thought they were brilliant shorting 7 million shares of stock in a company the CEO found himself on the wrong side of a 1.8 million share margin call, but the stark reality is that the shorts still find themselves 7 million shares short. Now with professional management and the proper accounting procedures in place, I think they have missed an opportunity to cover their enormous short positions. We are now in prime retail season and a new iPhone launch is coming.
Tell the Shorts that Smartphone Sales are Booming
I simply don't understand why the professional shorts don't believe in the mobile revolution. Zagg, Inc. completes a trifecta of great companies that are set up to exploit the booming smartphone market. The common denominator in these three companies is they all have obnoxiously high short positions. When I look at the short positions in Zagg, Inc., Mitek Systems (MITK) and Skullcandy (SKUL), I can't help but think who is doing the market research on these companies. With Zagg trading at 10 times earnings, Skullcandy trading at 13 times next year's earnings, and Mitek Systems having licensed their patented flagship technology to 25 of 40 largest banks, I want to ask, aren't there better targets to short?
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 InvisibleShield 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.
ZAGG also holds 37% 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 30 million shares outstanding, of which there are 7.1 million shares short. Institutions own 16.4 million shares, and insiders own 8.9 million shares.
- The last three years' revenues were $38.1 million, $76.1 million and $179.1 million, respectively, with 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 $0.83 versus $0.63 in 2011.
- ZAGG has met or beat the Street estimate for seven quarters in a row.
- The current short position is 30.5% of the float according to ShortSqueeze.com.
- ZAGG has a PEG ratio of 0.38.
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. It has been 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 11.65 million shares short. Institutions own 20.9 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 42.75 million shares, 15.75 million shares more than what is currently outstanding. The short interest is approximately 77% 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' revenues were $118 million, $160.5 million, $232.4 million, respectively, 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 0.69
- For more info on SKUL
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 Systems' Remote Deposit Capture is able to record pictures of checks and accurately deposit them in a bank or brokerage account. MITK has signed up 408 banks, including BOA (BAC), Chase (JPM), Wells Fargo (WFC), Schwab (SCHW) and Fidelity. To date, 137 clients have successfully implemented the technology.
The generational improvement in smartphone cameras is quickly allowing mobile imaging to enter additional markets. The possibilities are unlimited and go so far beyond simply depositing checks. Mitek has already developed an application for paying bills. With this application and one click, you will be able to pay bills from your smartphone. Mitek has developed an application being used by Progressive Insurance (PGR) where you take a picture of your driver's license and they can give you a quote on your insurance. In the future, we see smartphone applications for pharmacy forms, medical records…well, you get the picture.
There are irreversible trends in technology today that should make MITK mobile imaging technology the industry standard in many markets. Early adoption is already underway. The independent market research firm AlixPartners has published a mobile banking report funded by Visa favorable to Mitek Systems. The research report calls for 1.5 billion mobile deposits by 2014. According to the market research, the transactional cost of a deposit is cut from $1.50 per transaction to a dime when using mobile check deposit.
- Mitek Systems has an application to take a picture of your driver's license and get an insurance quote.
- The company has $15 million in the bank, alleviating the need for additional financing.
- Mitek's Bill Pay (pdf) was named best of show at Finovat Spring 2011.
- The company has developed a point and shoot application to transfer credit card balances to springboard into new markets.
- MITK has a proven and experienced management team.
- Mitek Systems has partnered with industry leading banks to propel its growth to the stratosphere.
- The current short position in MITK is 6.98 million shares and growing; large short positions can be quite difficult to cover, often resulting in a short squeeze when market conditions turn.
- For additional information on MITK.
The USAA Lawsuit
The shorts began seriously shorting the stock when it was around $10 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.
They Often Lose Big
Priceline.com Inc. (PCLN) was a fad that was supposed to die in the dotcom bubble. Who could have guessed that a reverse auction travel portal could have created such losses for the non-believing professional shorts. In 2002, this stock was trading for approximately $4 and now is currently $604. This is what happens to a stock when a company performs and you have an entrenched short community willing to go down in flames.
Sourcefire Inc. (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 estimates, and the stock gapped up from about $34 to $37. The stock then traded straight to $50.
Ultimate Software Group, Inc. (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 $100. 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.
Lululemon Athletica 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.
I'm a huge believer in the smartphone revolution. I have focused my speculative portfolio on companies that will benefit from this emerging trend. The shorts seem to have placed massive bets against it. They are short 30% of the float in ZAGG, 77% of the float in SKUL and 34% of the float in MITK. The shorts, in the short-term, have managed to suppress the price of these 3 equities, but I am betting time is on my side. If one of these 3 end up in a short squeeze, it's a home run. Is it too much to expect from all three?