On Tuesday, I recommended restaurant stock DineEquity (NYSE:DIN) because, being in the cyclical consumer discretionary sector, the stock may have further upside should the recent outperformance in that sector continue.
Today’s stock makes tech-related products and is closely tied to consumer spending. Skullcandy (NASDAQ:SKUL) is known for its hip premium headphones and other audio accessories that it markets to the “in-crowd.”
From a fundamental point of view, the company is growing both its top-line revenue and its profit margins. It has had some inventory investments this year that made its cash burn rate look ugly, but burning cash to build inventory for expansion is a fairly straightforward procedure for growing companies.
More structurally speaking, the company currently has a huge amount of its stock being shorted — roughly 75% of the floating stock is sold short. Such high short interest can easily lead to a short squeeze. A short squeeze occurs when short-sellers get caught by positive news and all have to buy back stock at the same time, causing the price to rise sharply.
In mid-July, SKUL’s short interest ratio (number of stock being sold short divided by average daily trading volume) stood at almost 44. In other words, it would have taken 44 days of trading for all the short sellers to buy back stock. Since then, the stock’s average daily trading volume has increased significantly, and thus has brought down the short interest ratio to about 13.
On the chart, SKUL looks good for a long-side trade on a close above $16.50. A series of higher highs and lower lows since the May lows, which has been accompanied by more upside room in the momentum oscillators, looks promising. The initial upside target is $18, and a stop-loss should be set near $15.50.