Investing in highly shorted stocks is always risky business, especially when these stocks have some of the highest short interest around. The five stocks below all have short interest in excess of 40%, but could be worth taking a look at on the long side. One slight problem with highly shorted stocks is that they are sometimes shorted for a reason. Question is; is the short interest overdone and is their reason to go long any, or all, of these stocks? The five stocks below are highly shorted, but could be worth a closer look for investors looking to add a little speculation to their portfolio.
All the high-short stocks appear to be cheap from a valuation standpoint, but could this be due to an overpressured stock price, let’s take a closer look. Over the past twelve months, Skullcandy Inc (NASDAQ:SKUL), Vera Bradley, Inc. (NASDAQ:VRA) and Deckers Outdoor Corp (NASDAQ:DECK) are all down over 20%, but Coinstar, Inc. (NASDAQ:CSTR) and Tesla Motors Inc (NASDAQ:TSLA) are up.
|Skullcandy||Vera Bradley (NASDAQ:VRA)||Deckers||Coinstar||Tesla|
|Trailing Twelve Months||-43%||-24%||-51%||16%||66%|
Skullcandy Inc (NASDAQ:SKUL) has 53%short interest and manufactures headphone and other audio products. The stock is down nearly 40% over the last twelve months and hedge fund interest has been relatively weak for the headphone company. The squeeze, short squeeze that is, has been coming for some time, but Skullcandy is still waiting. The stock is down over 50% over the last six months alone despite meeting or beating earnings in each of the last four quarters. This company is like a number of others below, still growing and still profitable, but getting little attention from long investors, and a lot of attention from shorts. The slowdown may well be attributed to the over-focus of its business model, which relies heavily on consumer discretionary spending. However, with declining unemployment and an improving economy, the company should be able to achieve its projected (by Wall Street analysts) 18% five-year annual earnings growth.
With a market cap of only $180 million, Skullcandy could also be the target of a buyout. Bloomberg even reported that the sharp decline in the stock in the past eighteen months has made the company an attractive takeover target. Skullcandy’s long-term initiatives relate to its plans to expand beyond the U.S., which has been its primary market. Skullcandy is trading at a 7 times earnings, where the industry is near 12 times. Other key metrics that bode well for the valuation includes its S&P relative value. Compared to the S&P 500 price to earnings ratio, Skullcandy has traded at 98% of the S&P 500 P/E over the last five years (on average), but now only trades at 47%.
Vera Bradley, Inc. (NASDAQ:VRA), with around 53% short interest, is a designer and producer of accessories for women, including handbags and leisure items. Vera also has billionaire Steven Cohen as one of its top investors (check out all the hedge funds loving Vera). Vera recently upped its fourth quarter 2012 revenue and earnings guidance, as well as gross margin expectations, now expected to expand 140 basis points for the quarter, year over year. Much of company’s previous weakness has been related to inventory buildup; a problem that management has identified and foresees no issues in being able to move this year. Despite consumer spending weakness in the past, Vera plans to capitalize on an improving economy and even added 54 locations in Dillard stores during the third quarter. Other expansion efforts includes its early-stage entry into Japan. Vera, much like Skullcandy, looks cheap on a relative S&P 500 P/E basis. The company has traded around 150% of the S&P 500 P/E over the last five years, but currently trades at 105%. Vera also boosts one of the top returns on equity at 44%, compared to 16% industry average.