Fossil Isn't a Stock to Bet Against

NEW YORK ( TheStreet) -- Is Fossil ( FOSL), the maker of watches and other accessories, a short seller's dream?

Short interest, the percentage of outstanding shares that investors are betting will fall, is just over 9%, the same as it was before the company raised 2012 guidance in mid-February. Short interest typically declines after positive news as investors grow more bullish.

Going into the last quarter's release, investors were worried about Europe and the implications from the decline in the euro. On top of that, the company had just announced the acquisition of Skagen Designs, a Dutch maker of watches, jewelry, sunglasses and clocks mainly for the European market, as the European financial debt crisis mounted.

Despite those concerns, the stock had appreciated more than 30% in six weeks, making a short position understandable. Adding fuel to the fire, Brean Murray downgraded the stock.

Then the shares popped another 15% the day the company reported earnings, and three more downgrades followed.

So where is the opportunity? Gross profit margins and the Skagen acquisition are the answers. Margins have been under pressure for some time now given higher labor costs overseas and increased commodity costs. Pressure from commodities will ease in the second half of the year, and the company is implementing price increases. And there's been an improvement in the euro -- up 4% since reaching a low in January. Combine all that with a better mix of exposure to the higher-margin international segments, and you have improving profits.

The Skagen acquisition is expected to close at the end of this month, yet few Wall Street analysts have included the impact from the deal in their models. Ike Boruchow, equity research analyst at JPMorgan ( JPM), says Skagen can add $0.45 to $0.50 to 2013 earnings, which would warrant upside to the stock price that isn't being accounted for. Boruchow says "numbers could move materially higher and business could potentially inflect in the second half of the year," driven by gross margins.

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