Upbeat On Possible Earnings Surprises From Skullcandy And Sonic Automotive

by: Tom Payne

Extremely large short positions create a degree of excitement around earning announcements. A large short position can be quite an accelerate for price appreciation if earnings beat the street estimate. Low beta stocks can suddenly gap up, leading to a flurry of short covering.

The Examples

Sourcefire Inc., Inc (FIRE) has a huge short position. The institutional holdings in Sourcefire is 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 estimate and the stocked gaped from about $34 to $37. The stock then traded straight to $50.

Ultimate Software Group, Inc. (ULTI) put out their 3rd quarter earnings and the stock gaped up. ULTI gaped from about $52 to $56. Since then ULTI has traded as high of $72.29. 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.

The Squeeze Candidates

Here's why an earnings surprise in Skullcandy (SKUL) could propel SKUL to new highs.

  • Skullcandy has 27 million shares outstanding, of which there are 8.7 million shares short. Institutions own 13.3 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 34.2 million shares, 7.2 million shares more than what is currently outstanding. The short interest is approximately 85% of the float.
  • The last three years revenues were $118 million, $160.5 million, $232.4 million, and projected revenues for 2012 are $280 million.
  • 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.
  • Total institutional holdings increased by 2 million shares last reported quarter.
  • Skullcandy is followed by 8 analysts all having buy recommendations with a consensus price per share estimate of $22 and a high of $28
  • For more Information on SKUL.

Here are the reasons an earnings surprise could propel Sonic Automotive Holdings (SAH) to new highs.

  • Auto sales in the US were incredibly strong in the 1st quarter.
  • Institutions hold 99% of the outstanding stock. Major holders have 24% of the outstanding stock. The declared short position is approximately 20%.
  • Sonic Auto Holdings had earnings of $1.39 per share in 2011 with $1.66 per share projected earnings in 2012. This gives SAH an incredibly low PEG ratio of .51.
  • There are currently 8 analysts following the company with a consensus estimate of $21 per share and a high of $29.
  • For more information on SAH

The Driving Influence

I believe both of these stocks have a better than average chance to beat the street estimate. There are underlying consumer market conditions that could drive both stocks to new highs.

Skullcandy's sales are being driven by a revolution in mobile phone and tablet sales. All of these modern devices have the ability to play music and have a use for headphones. Sonic Automotive Holdings is being driven by the resurgence in Auto sales.

Each of these companies have ridiculously high short interest and a upside earnings surprise could send these shares higher. It would seem impossible for the shorts to cover without driving the stocks much higher.

Disclosure: I am long SKUL, SAH.