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Freescale Is Crushing Short Sellers

Stocks in this article: FSL

NEW YORK (TheStreet) -- Shares of chip maker Freescale Semiconductors (FSL) ripped higher last week and hit a 52-week high on Monday. Over the past month, they have gained about 50%.

The question shareholders are asking now is if this is the time to ring the register and take profits.

Some profit-taking may be warranted, but based on earnings estimates, you want to maintain exposure because the least path of resistance is upward. Freescale is now profitable on a non-GAAP basis, although it posted a net loss for its most recent quarter, meaning the stock isn't really undervalued.

FSL Chart

Over the last month, the shares have moved from $15.30 to almost $23. I think Freescale will test the $30 level in the next 12 months. Here's why:

Earlier this month, Freescale announced a secondary offering of 35 million shares at $18.50 and underwriters have the option to purchase 5 million more. The secondary offering represents about a 15% dilution for current shareholders.

More often than not, dilution is a bearish event. In Freescale's case, though, it's different; the company is using the proceeds to reduce debt. The company will pay all of the 10.125% senior subordinated notes due in 2016 and some of the 8.05% senior unsecured notes due 2020.

The savings gained from the reduction in interest expenses should more than offset the impact of dilution. The lower debt load will go a long way toward cleaning up the balance sheet. The ability to sell shares at $18.50 also demonstrates the value of the stock and why I think investors shouldn't be quick to take all the money and run. 

Another hidden gem for shareholders won't be found in the company's financial documents, although investors can find it on a Nasdaq short interest chart.

Freescale has a relatively small float combined with a 17.5% short interest. The shorts are already reeling in pain, and as they scramble for the exits, their buying pressure will feed upon itself, potentially pushing shares much higher.

On the other side of the short sellers is the management team. CEO Gregg Lowe owns more than 400,000 shares, and CFO Alan Campbell owns more than 200,000 shares. As investors, we want to see management having skin in the game too.

If you don't already own shares, look for a dip as a buying opportunity. The stock is volatile enough that investors shouldn't need to chase it (although shorts may need to). For exact entry and profit target ideas, I posted a Real Money Pro Freescale entry that I think presents a reasonable risk versus reward.

Freescale is trading above some analysts' price targets. But expect upward revisions to continue, which in turn will lift the stock. As long as the management can continue executing at the current pace, shareholders should have a profitable 2014.

At the time of publication, Weinstein had no positions in the stock mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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