ZAGG Is in Trouble

There's always something fishy when a company waits until Friday night to issue a press release, and that's exactly what gadgetry accessories specialist ZAGG (Nasdaq: ZAGG  ) did over the weekend.

ZAGG shares opened nearly 16% lower this morning on news that that CEO Robert Pedersen would be stepping down. ZAGG announced the departure more than an hour after last week's final closing bell.

There's no need to speculate about the abrupt decision. A margin call last week forced Pedersen into selling 515,000 shares of the company's stock at an average price of $8.22.

The $4.2 million sale was probably triggered after the stock took a hit earlier this month on disappointing quarterly results. Revenue growth of 59%, profitability per share surging 80%, and revising its guidance higher in its second quarter weren't enough to win over skeptics.

ZAGG has carved a cozy living making smartphone screen protectors and tablet keyboards for Apple (Nasdaq: AAPL  ) and Android products, but there has never been a shortage of skeptics. Will low-cost competitors disrupt ZAGG's pricing flexibility? Will Corning (NYSE: GLW  ) improve Gorilla Glass to the point where ZAGG's invisibleSHIELD is no longer necessary?

ZAGG closed out July with nearly 7.1 million shares sold short, resulting in the highest short interest ratio -- more than 16 days to cover -- for the stock over the past year.

Well, the shorts won this round, and Pedersen's margin call isn't sitting well with the company.

ZAGG adopted a new policy on Thursday -- two days after Pedersen's stock sale -- prohibiting directors, officers, and 10% holders from engaging in short-term or speculative transactions involving ZAGG in margin accounts.

Pedersen isn't the first executive to be burned by a margin call on his own company's stock this year. Green Mountain Coffee Roasters' (Nasdaq: GMCR  ) chairman and lead director also buckled under the margin call pressure in May.

This may make perfect sense to anyone smart enough to be a company executive, but it's a problem when corporate leaders have too much of their wealth tied into their company's stock.

The margin call fiasco may not have a direct impact on the company's fundamentals, but at least one analyst isn't sticking around to find out. Janney Capital Markets downgraded the stock -- from buy to neutral -- to watch this play itself out from the sidelines.

Come to think of it, that's probably what Pedersen should've done with his margin account.

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The Motley Fool owns shares of Green Mountain Coffee Roasters, Apple, and Corning. Motley Fool newsletter services have recommended buying shares of Apple, Green Mountain Coffee Roasters, and Corning. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple, writing naked calls on ZAGG, and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Green Mountain. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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