3 Shorts About to be Squeezed

By Kyle Farrah - July 23, 2012 | Tickers: AAPL, KO, SKUL, SODA, ZAGG | 0 Comments

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Occasionally stocks that are growing earnings consistently year over year will see their prices tank due to overly skeptical short sellers. When this happens the stock falls far below a reasonable value, and any positive news or other catalyst such as earnings will force shorts to buy back shares they sold short (cover their shorts) and the stock will skyrocket higher, as more short covering begets more short covering, until finally the stock reaches a higher price than anyone could have predicted.

In order to find potential short squeeze situations I ran a simple screen. Companies had to have at least 30% of the float sold short, a PEG ratio of less than 1.00, and a five year growth rate projection of at least 15%. Here are the five best stocks that meet those criteria (in my opinion):

Skullcandy

Skullcandy (NASDAQ: SKUL) is by far one of the most heavily shorted stocks in the market. There are currently 11.56 million shares short in this stock, which represents 71.5% of the float. Shorts don’t believe that Skullcandy can maintain their competitive position in the headphone/headset industry amidst so much larger competition. However the company has continually shown that the Skullcandy brand does have staying power. Consumers love the Skullcandy Brand, and the company has been able to consistently grow both top and bottom line over the last several years. With an EPS growth rate of around 20%, and a PE of only 12.67 times this year’s earnings, the company looks tremendously undervalued, and should move much higher on any positive news, no matter how trivial.

SodaStream

I wrote about SodaStream International (NASDAQ: SODA) here, and here. The company is also a tremendous buying opportunity as the stock trades at only 18 times this year’s earnings, with a five year growth rate of 30%, giving the company a PEG of only .60. Shorts have continually sold this stock short on skepticism that the SodaStream brand would not continue to grow, and that the product was a fad. However the company has continued to prove the shorts wrong. The company not only beat earnings in each of the last four quarters by double digits, but they also saw tremendous growth in carbonator refills, and additional flavor packs. This shows that customers are not only buying the SodaStream machine, but are also using it over and over again. SodaStream is another company that consumers love.

ZAGG

Zagg Inc. (NASDAQ: ZAGG) is another company that terrifies investors. The company makes protective screens for mobile phones, and has seen tremendous growth over the past few years. The stock has 30% of the float sold short, as traders speculate that the company will not be able to maintain margins as new competitors emerge in the market. Given the company’s high five year growth rate estimate of 25%, and its current price of 13.3 times 2012 earnings I expect the company to do well in the near future. I am however skeptical about the company’s prospects long term. The low barriers to entry and highly competitive nature of the industry will make it difficult for the company to keep up its margins and stay profitable in the years ahead.

Risks

While these companies may provide a tremendous opportunity for investors, they are not without their risk. Both Skullcandy and Zagg are highly dependent on Apple’s future. Apple (NASDAQ: AAPL) products have seen tremendous growth over the last few years, and this has helped the companies that sell accessories for Apple’s products. If Apple sees a slowdown in iPhone sales, or other devices, both ZAGG and SKUL could see a slower or non-existent growth rate.

Additionally SodaStream has to worry about Coka-Cola (NYSE: KO). Recently Coke threatened litigation against SodaStream over a marketing campaign by SODA. If Coke pursues legal action against the company, SodaStream’s shares could be adversely affected. Though I don’t expect this to be material to the company, it is a risk that needs to be acknowledged.

Conclusion

I expect SodaStream, and Skullcandy to perform extremely well over the months and years to come. The stock may go up extremely quickly in the short term as shorts are forced to cover their positions. Additionally I expect ZAGG to perform well in the short term, but I am not as confident about their long term prospects. It is still a buy, but investors should tread carefully.

To read this article and many others go to the Author's Personal Blog.

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