Headphone manufacturer Koss (NASDAQ:KOSS) had a solid 2020. In fact, KOSS stock rallied 123%. But that performance had nothing on what the stock would do in 2021.
That said, there were some inklings of what was to come. On Dec. 29, KOSS stock suddenly took off. At one point intraday, shares had doubled to just above $5. More than 15 million shares traded in the full session, meaning that on average each share of the company changed hands twice in a single day. Incredibly, volume was almost 10x the float at the time.
The next day, volume still totaled a million shares. After that, however, traders moved on, and KOSS went back to being a sleepy micro-cap. At its Jan. 15 close of $2.90, Koss was worth just a bit over $20 million.
Then the stock went absolutely nuts. On Jan. 28, KOSS stock hit an intraday high of $127.45. At that price, the market was valuing the company at nearly $1 billion, and more than 50x trailing 12-month revenue.
Unsurprisingly, KOSS stock has plunged since then. But even down nearly 90% from that intraday high, it still has a good deal further to go.
Where’s the Squeeze?
Unsurprisingly, the incredible spike in KOSS shares was driven by the same r/WallStreetBets crowd responsible for driving up so many stocks across the market.
But as we’ve seen with all those names, elevated levels can’t hold. Gravity sets in.
Now, the WSB crowd is looking for heavily-shorted stocks to execute a so-called “squeeze.” In that scenario, investors (or, more accurately, traders) can profit by buying stock and then selling at a higher price to short sellers forced to cover by that very rally.
And, indeed, Koss has a reasonably heavy short interest. As of Jan. 29, about 756,000 shares were sold short. That’s only about 10% of shares outstanding. But, owing to large family ownership, short interest totals nearly half of the float.
Here’s the catch: the spike in short interest only came after KOSS stock turned parabolic. At Jan. 15, short interest was less than 13,000 shares.
So there aren’t shorts out there with large positions that are significantly in the red. Koss’s market cap means none of those positions are all that large; the entire float at Friday’s close is worth only about $23 million. And with volume so high – averaging 1.5 million shares a day last week – shorts certainly aren’t about to get trapped.
KOSS also isn’t optionable, which limits the potential for gamma squeezes, which have been an underappreciated part of the recent rallies in stocks popular with WSB.
Again, a squeeze of any kind is not an investment thesis. It can create profits for nimble, experienced traders, but all squeezes end.
The issue with KOSS is that the conditions don’t even exist for a squeeze. This simply has been a wave of coordinated buying, a wave which already is receding.
The Fundamental Problem with KOSS Stock
KOSS stock recently was trading around $13. That does not make the stock “cheap.” The $127 high was ludicrous. $15 still is ridiculous.
Bear in mind that this is a company that generated just $18.3 million in revenue in fiscal 2020 (ending June 30). Admittedly, the novel coronavirus pandemic was a factor, as certain export markets basically shut down.
But the long-term trend is concerning. Koss has a rich history – the company in fact invented stereo headphones in the late 1950s – but its sales are heading in the wrong direction. In FY2013, revenue was $35.8 million. The figure declined almost 40% over the next six years.
A bull could argue that the pandemic will provide a boost to sales. Other audio providers have gotten a boost as consumer spending on travel and restaurants is redirected to consumer products. But revenue increased just 6% in the first two quarters of FY2021. Operating income was barely positive, and just 1.3% of sales.
The Bottom Line
Koss’s earnings per share over the last four quarters (which equate to calendar 2020) were just 10 cents. That’s less than $1 million.
Even after the pullback, KOSS stock has a market capitalization more than $100 million.
So investors need to ignore the charts, and the noise, and look at what KOSS is now. It’s not a bad company, certainly. But there is a reason why its market capitalization generally was a quarter of what it is now, if that. This is a small, somewhat sleepy, business facing significant competition and posting minimal growth at best.
It’s not a business worth more than $100 million. Even the Koss family knows that. Executives, including family members, already have sold $42 million worth of stock. Investors should follow them out.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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