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Dr. Duru, One-Twenty Two (112 clicks)
Long/short equity, event-driven, homebuilders, currencies
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After Morgan Stanley downgraded Skullcandy (SKUL), I quickly wrote that I thought the sell-off was way overdone and marked a buying opportunity. From comments and other posts I have seen, it seems this was a common opinion amongst folks following this company. The following day, SKUL gapped up (giving me little time to buy) and has yet to look back. On Friday, October 5th, the stock reached as high as $14.58 before pulling back to $14.15. SKUL not only recovered all its losses from the Morgan Stanley downgrade, but it got "close enough" to Morgan Stanley's price target of $15 - all in less than a month. The charts below show that SKUL is now stalled at its 50 and 200-day moving averages (DMAs) and show the complete stock action since the IPO.

(click to enlarge)

Skullcandy recovers its Morgan Stanley losses and now awaits a new catalyst

(click to enlarge)

While maintaining support around $12, Skullcandy is printing a series of lower highs

Source: FreeStockCharts.com

Note also that SKUL still has printed a series of lower highs while maintaining lows around $12. So, now comes the tough part for SKUL. It will likely need a new, positive catalyst to generate significant gains from here. Like a buoy, the stock has merely snapped back to equilibrium after getting dunked by a crushing wave. SKUL will not report earnings until November 1st, so between now and then, the stock will likely get buffeted by general market movements (absent any earnings pre-announcements). The general market is not likely to make much progress over the next month, so given this assumption, I decided to close out my position for now.

It is not yet clear whether short-covering will serve as a positive catalyst for shares. Based on settlement dates, shares short dropped from 11,247,107 to 10,995,099 from August 31 to September 14 (now a jaw-dropping 68% of the float). Thus, we only have information on trades before the Morgan Stanley downgrade. This drop is part of a very slow reduction in shares short that started from the all-time peaks in June and July. Until the downgrade, SKUL slowly meandered upward as shorts covered, so it is certainly possible short-covering was pushing the shares up. However, the overall drop of 744,372 shares (6% of the peak) is less than two days of trading volume in SKUL. Moreover, most of the drop occurred in one month from mid-August to mid-September. I am guessing the next update on shares short will be closely watched along with the next earnings report.

The path forward for SKUL will likely remain rough (for example, watch out for a Morgan Stanley reiteration?). However, barring any negative surprises November 1st, I remain a buyer on dips.

Be careful out there!

Source: Skullcandy Recovers Losses From Downgrade - Now Comes The Tougher Part