The broader market has been trading in a tight range for a few days now, which eventually should lead to a move up or down out of this cozy little zone.
On Tuesday I discussed a restaurant stock (Dineequity INC – DIN), which being in the cyclical consumer discretionary sector may have further upside should the recent out-performance of the sector continue. Today’s stock while officially in the technology sector is very closely tied to consumer spending. Skullcandy (SKUL) for the large part sells premium head phones to the in-crowd.
First, from a fundamental point of view the company is growing both its top line revenue as well as its profit margins. The company has had some inventory investments this year that made its cash burn rate look fairly 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 three quarters or 75% of the floating stock is sold short. Such large readings of short interest can easily lead to so called short squeezes – when short sellers get caught by positive news in the stock and they all have to buy back stock at the same time, causing the stock to rise sharply.
In mid July the stock’s so called short interest ratio (number or 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 average daily trading volume has increased much and thus brought down the short interest ratio to about 13.
On the chart the stock looks good for a long-side trade on a close above $16.50 as a series of higher highs and lower lows since the May lows, accompanied by more upside room in the momentum oscillators look promising. A first upside target is $18 and a stop near $15.50 would make sense.