News Analysis date published New: 
Friday, September 28, 2012 - 16:00
New Date created: 
Monday, October 1, 2012 - 17:30
New Date last updated: 
Friday, September 28, 2012 - 16:00

These Small-Caps Could Ride the iPhone 5 to 100%-Plus Gains

Friday, September 28, 2012 - 4:00pm

Apple changed the size and shape of the iPhone compared to previous models. This means old cases won't fit the new phone. They also changed the power plug, so old docking devices no longer work with this new model. Investors should focus on the fact that there are now 5 million new customers for iPhone accessories.

One of the biggest upgrades for the new iPhone is the retina display, a screen that displays images with a high level of detail. Users of any smartphone know that dropping their phone, something that happens to everyone, often damages the screen. For typical cellphone displays, this might not matter much, but new iPhone users seem very likely to apply an inexpensive screen protector to their very expensive phone.

One of the leading screen protector providers is Zagg (Nasdaq: ZAGG), which makes other smartphone and tablet PC accessories as well. ZAGG's management reports that they are the biggest player in this sector with a market share of about 18%, which is nearly twice as large as their nearest competitor. Sales are expected to grow about 38% a year for the next three years, and analysts expect earnings growth of more than 26% a year.

ZAGG is trading at about 11 times current earnings and eight times next year's estimated earnings. The low price-to-earnings (P/E) ratio may be related to a class action lawsuit the company is facing. The former CEO pledged a large number of shares as collateral for personal loans and the board of directors moved to replace him because of it. The details will come out in the eventual settlement, but class actions are generally resolved without serious harm to a company. ZAGG should rebound when this is settled or even before then.

The chart shows the effect of the bad news and allows for easy identification of a resistance level near $11. Earnings are slated to be announced on Nov. 12, and their performance could push the stock price up.

Investors wanting to capture that event with options would have to buy calls expiring in February 2013. At-the-money $8 calls are selling for about $1.15. If ZAGG hits $11, the options would be worth $3 and deliver a gain of more than 160%.

Recommended investment setups: Buy ZAGG with a buy-limit order of $8.17, set stop-loss at $7.44 and a price target at $11 for a potential 35% gain in five months. Or Buy ZAGG Feb 2013 8 Calls for $1.50 or less, do not use a stop-loss and set a price target at $3 for a potential 100%-plus gain in five months.

Popular among sport fans
Another maker of popular iPhone accessories and headphones is Skullcandy (Nasdaq: SKUL). Skullcandy's products are also popular with gamers and extreme sports fans. The company has even partnered with several NBA basketball stars.

Company management expects to report 2012 earnings of $1.10 to $1.20 a share, which means Skullcandy its price-to-earnings (P/E) ratio is below 10. This is a low P/E ratio for a company with earnings expected to grow by 15% this year and another 20% next year.

The stock has only been trading for about a year, and many investors seem to be wondering whether Skullcandy is a fad. Long term, it might turn out to be, but in the short term the stock is near a support level and on a stochastics "buy" signal.

Since Skullcandy began trading, there have been 11 previous stochastic "buy" signals and 63.6% of those trades would have been winners. A price move to resistance at $16 would offer investors a gain of about 19% in the stock.

November $12 call options on Skullcandy are very reasonably priced at about $1.75. At $16, this option would be worth at least $4, making the potential profit about 129%.

Recommended trade setups: Buy SKUL at the market price, set stop-loss at $12.40 and a price target at $16 for a potential 19% gain in three months. Or buy SKUL Nov 12 Calls at $2 or less, do not use a stop-loss and set a price target at $4 for a potential 100%-plus gain.

Action to Take -- > Apple undoubtedly has a winning product in the iPhone 5. ZAGG and Skullcandy offer great low-priced ways to pursue profits in this hyped market.

This article originally appeared on

These Small-Caps Could Ride the iPhone 5 to 100%-Plus Gains

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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