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Unknown, Unloved, and Undervalued: Skullcandy as a Lynchian Investment

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October 12, 2011 – Comments (3) | RELATED TICKERS: SKUL , GOOGL

“If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them”—Peter Lynch, investing legend.

Ever since my first exposure to Peter Lynch’s unique investment philosophy—summed up, in its elementary form, by the phrase “invest in what you know”—via his classic book One Up On Wall Street, I have been unable to shake this powerful mantra from my mind. His somewhat counterintuitive view that laymen have an advantage over Wall Street regulars strongly resonates with me, for a variety of reasons.

My first investment in equities was a very unique an instructive one. Having been gifted $10,000 by a relative (for tax reasons) in high school, I was eager to invest my newfound fortune so that I could retire by, say, the end of college. Having observed the growing ubiquity of Google, its ease of use, smooth look, superiority over Ask Jeeves, and rising stock price, I scooped up 45 shares of it after a few weeks of consideration. Needless to say, “diversification” was not a term I was familiar with.

Watching with joy as the stock ran up to above $300/share in a matter of months, my shares, inevitably, suffered a minor pullback. I freaked out and sold at $290.

Looking back on it, it’s obvious that I didn’t do enough analysis on the company to begin with, and that I foolishly (not Foolishly, of course) failed to predetermine both my investment horizon and tolerance for volatility. However, reflecting back now, I do think that I benefitted from having a perspective that was largely ignorant of analysts’ target prices and the sentiment of Wall-Streeters.

Skullcandy, of course, is radically different from Google, and it is a company seldom written about. Its IPO was only a few months ago, and its products are hardly ubiquitous. But there is something about the Skullcandy image and product that feels distinctly Googley (insofar as it mirrors my gut feelings on Google years ago).

Skullcandy “is an audio brand that reflects the collision of the music, fashion, and action sports lifestyles,” explains its website. As the youthful, rebellious feeling of Occupy Wall Street gains momentum, popularity, and exposure, SKUL seems especially relevant as a company that claims to “symbolize youth and rebellion.” Furthermore, it’s hard to think of a more timely motto for the company than its current one: “Every revolution needs a soundtrack.”

But this coincidence is not why I see this stock as so alluring. Last Christmas, I received a pair of Skullcandy headphones, and I’ve been extremely satisfied with them. I remember I was immediately taken by their style. The company prides itself in its colorful design and quality materials. In an age where the consumer has become enamored with a “smooth” look, Skullcandy seems to have nearly perfected the style. I’m ashamed to say that I’ve found myself on more than one occasion unconsciously feeling the soft, silky fabric of the portable headphone pouch that my beloved headphones came in.

Peter Lynch would be happy to know that Skullcandy’s products do sell in my local mall, and I recently felt a tinge of guilt as I noticed how quickly I felt the urge to purchase a style of their headphones even sweeter than my own on display at a nearby bookstore.

While I feel strongly that this is a unique brand and company that is poised for a boom in popularity, it’s still far from being a surefire success, as the headphone business does not enjoy particularly large barriers to entry. A young company, Skullcandy doesn’t have much of an earnings history; one of its largest distributors (Best Buy) is in financial trouble, and its CEO resigned suddenly a few months before its stock went public. Although its top and bottom-line growth has been extremely impressive (up 46.4% and 106% YoY in 2Q ’11, respectively), the fact remains that many of its competitors are much larger, and are able to enjoy tremendous economies-of-scale.

One of Peter Lynch’s more important pieces of advice, was that great companies do not simply pop into existence overnight, and that investors can still find incredible opportunities in stocks that have already doubled—prior exceptional appreciation does not forbid future exceptional appreciation. Of course, SKUL certainly has not doubled since its IPO price of $20, and I still think that there are some pretty substantive uncertainties for the company moving forward. But when there is a clearer picture of the company’s earnings trajectory—as well as Best Buy’s future—it will be easier to tell if this company has all the potential that the layman inside of me tells me it does.

 

Sources:

http://www.investopedia.com/university/greatest/peterlynch.asp#axzz1aaNAIgXB

http://investors.skullcandy.com/

(Company 10-Q, Page 4): http://apps.cnbc.com/resources/asp/getReportPdf.asp?docKey=168-111042719-3C917NOSM6LRDLJ8VCO20LTLJ9&docType=PDF

 

3 Comments – Post Your Own

#1) On October 12, 2011 at 5:23 PM, BillyTG (29.50) wrote:

I see their products everywhere, and own some SC headphones. +1

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#2) On October 21, 2011 at 8:04 PM, Howch (< 20) wrote:

I deliver mail near a midwestern college campus and observe the natives as they walk to class. Several years back, I started to see more and more students w/ what I know know are Ipods. Should have bought the stock back then. Being new to TMF, and a new investor, I have been looking for new trends among the hipsters. I have recently noticed more and more students wearing large headphones and crazy colored earbuds that are made by skull candy. I am soon going to be long on SKUL.

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#3) On October 31, 2011 at 2:29 PM, BurntTiger (20.99) wrote:

Way to stay alert and clue the rest of us in on this one. I went to my local best buy and asked about how skull candy sells and was told that skull candy is the "it" thing to have for the younger generations and they sell out regulary  At least 50% of people with earbuds on my college campus have them and give them glowing reviews.i thought back to Lynch and his example of the GAP. Picked up some shares the other day. Once again thanks for the heads up

 Long skul

 

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