Skullcandy

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

My first earnings short-squeeze trade play today is audio headphones maker Skullcandy ( SKUL), which is set to release its numbers on Wednesday after the market close. This company is an audio brand that reflects the collision of the music, fashion and action sports lifestyles. Wall Street analysts, on average, expect Skullcandy to report revenue of $44.29 million on earnings of 4 cents share.

On Monday, Morgan Stanley published a research report on Skullcandy that said the firm remains bullish on the stock following store checks. Morgan wrote: "Observations suggest consumers increasingly buying headphones when purchasing smartphones. Retailers seeing less price resistance for high-end product. We think SKUL is taking share at BBY and at least maintaining share elsewhere. New packaging transition seemingly going smoothly." Morgan maintained its overweight rating on the stock with a $21 price target.

The current short interest as a percentage of the float for Skullcandy is ridiculous at 126.5%. That means that out of the 8.33 million shares in the tradable float, 9.2 million shares are sold short by the bears. This is a gigantic short interest on a stock with an extremely low float. If Skullcandy crushes earnings and raises forward guidance, then this stock could easily explode through the roof post-earnings.

In fact, this situation is unique with over 100% of the float sold short, so any bullish news could produce one of the largest earnings-related short-squeeze seen in a long time. Keep in mind this will all be predicated on a bullish quarter, so the bears had better be dead-on to be short so much its float.

From a technical perspective, SKUL is currently trading above its 50-day moving average, which is bullish. This stock IPO'd back in July of 2011, so there's currently not enough technical data to compile its 200-day moving average. During the last three months, this stock has been uptrending strong from its recent low of $11.87 toward its high of $17.76 a share. That move has now pushed SKUL within range of a triggering a major breakout trade post-earnings.

If you're in the bull camp on SKUL, I would wait until after its report and look for long-biased trades if this stock can manage to trigger a breakout move above some near-term overhead resistance at $17.76 a share with high-volume. Look for volume that registers close to or well above its three-month average action of 549,264 shares. If we get that action, then this stock could explode through its next major overhead resistance level at $19.75 a share, and possibly re-test its all-time high of $23.40 a share post-earnings.

I would simply avoid SKUL or look for short-biased trades if after earnings this stock fails to trigger that breakout and then drops back below some near-term support at $15.10 a share with heavy volume. Target a drop back towards some near-term support at $13.25 or possibly below $12 a share if the bears win this battle and destroy this stock post-earnings.

Skullcandy shows up on recent lists of 3 Short-Squeeze Stocks for Earnings Season and 4 Stocks With High Short Interest That Could Rise.

If you liked this article you might like

Fishing for Acquisition Candidates in a Shallow Deep-Value Pond

Is Kulicke & Soffa a Buyout Candidate?

Mill Road Capital Victorious in Skullcandy Bidding War

Is Uber Only Worth $28 Billion, Not $62.5 Billion? -- Tech Roundup

Insider Trading Alert - KSU, SKUL And UTEK Traded By Insiders