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Mr. Seneca is a finance veteran. Mr. Seneca developed his extensive finance and investment expertise as an investment banker with Goldman Sachs and Deutsche Bank. At these two prestigious institutions, Mr. Seneca conducted due diligence and engineered complex financial valuation models for IPOs,... More
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  • Technical Look At SKUL 0 comments
    Feb 8, 2012 8:47 AM | about stocks: SKUL

    Skullcandy (NASDAQ:SKUL went public in July 2011 and quickly hit a high of $23.40. Since then it has been a bumpy ride. One key reason the ride has been bumpy is that the stock has a HUGE short interest. Investopedia defines short interest as: "The total number of shares of a security that have been sold short by customers and securities firms. Short interest is typically expressed as a percentage. For example, 3% short interest means that 3% of the outstanding shares are held short." What this basically means is that a lot of people are betting that the stock price will go down. This was a position that many took in Opentable for a number of years and were recently proven correct when the stock went from a high of $118.66 in April 2011 to a low of $31.54 in November 2011, a drop of 73.2% in 7 months. Short interest can work the other way as well, though not as often. If the company continues to deliver great results then the "shorts" will begin to "cover" which increases demand for shares and causes the price to move higher.

    Having a large short interest is not desirable for the company or its investors. However, Skullcandy does have some good fundamentals:

    • · Strong management team that has consistently delivered good results
    • · Increased institutional interest since its IPO
    • · Exceeded analyst earnings expectations for the two quarters it has reported.
    • · Increasing top line
    • · Recognizable brand which may be attractive to acquisitive companies.

    While some of these may be debatable the analysis here is not a fundamental one. This is technical and I will refer to the graph to illustrate my points. The technical indicators are showing that SKUL will move higher. As you can see in the graph the price point of $14.00 has either been support or resistance for the short trading life of this stock (see the thick pink line in the graph). Whenever it has either broken below the support of $14.00 the stock has traded lower. When it has been able to break out above the resistance of $14.00 the stock has gone higher.

    Since December 2, 2011 the stock has been in a trading range with $14.00 as resistance and $11.79 as support (see blue shaded rectangle in the graph). SKUL has recently broken out of this trading range in dramatic fashion reaching $15.15. Additionally, the stock has touched and exceeded the upper band of the Bollinger band (the black dotted line) another indicator that the stock might breakout. Finally, volume has been strong at this breakout.

    All of this is to indicate that the stock has the potential to go higher. If it were not for the HUGE short interest this would look like a good trade (remember a trade is different from an investment). But there is a HUGE short interest so I suggest that those that are not invested to avoid the stock. For those that are invested they can employ an options position to protect the downside.

    A put spread, more specifically a debit put spread (debit because you will be paying money instead of collecting money on the strategy, like insurance) might be the way to go. I would look at purchasing the March 15 put @ $1.30 and simultaneously selling the March 12.5 put @ $0.40 for a total cost of $0.90 per share.

    This transaction breaks even at $14.10 a 6% drop from today's close of $14.96 and then stops making money at $12.50. If I had the option I would put the lower limit at $11.50 but the options on SKUL are thinly traded and only offer strikes of $12.50 or $10.00. So if the stock drops to $12.50 or below then the buyer of this strategy will make $1.60 per share. If the stock trades above $15.00 then the buyer loses the $0.90 that was paid for the strategy.

    In the end you are paying $0.90 to protect $1.60 in the event of a decline in the stock. I think you will see a test of the $14.00 support line before earnings which come out February 22, 2012. If the line holds then the stock goes higher. If the stock breaks below the $14.00 then it will go down and go down hard.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SKUL
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