A funny thing happened when SodaStream International (Nasdaq: SODA ) reported earnings a month ago. Shares initially shot higher after the company again beat revenue and earnings estimates, posting $0.52 per share and beating by $0.06. But after initially moving higher by nearly 8%, by the end of the day, the stock was actually trading lower than the previous day's close, down 0.7%, and would continue to fall for the next five days, in total a 15% loss from that intra-day high on no other news.
What happened, here? After all, quarterly earnings tend to be the major factor influencing a company's stock price, and beating estimates generally sends shares higher, as we saw immediately after the earnings report. After an earnings beat, Wall Street analysts hustle to raise their future estimates, helping to lock in those gains and sometimes pumping the stock even higher.
That didn't happen though. Even more bizarre is that heavily shorted stocks like SodaStream usually soar after good news as the shorts rush to cover their positions, an effect known as a short squeeze.
This time around, it seems like the pressure from the shorts forced the stock back down, as it has many times before. Despite beating earnings estimates by an average of 22% in the last four quarters, shares have essentially been flat in the past year. I think these short-sellers can only keep the stock down for so long, however. Considering it now trades at a forward P/E of just 14, if the company can beat estimates for a couple more quarters and maintain its strong growth rate, it could be too cheap to ignore.
Let's take a look at a couple other stocks trying to break out from the shorts.
Herbalife (NYSE: HLF ) had been one of the best performing stocks in the market since the recession, rising as much as 1,000% at one point since early 2009. But then something bizarre happened, as the chart below shows.
What happened in April that caused this stock to tumble so sharply? After all, Herbalife actually beat earnings estimates by 9%. But on that call, David Einhorn, manager of the Greenlight Capital hedge fund and noted short-seller, showed up and asked a few questions about the company's business model. Herbalife is a multi-level marketing company, meaning it sells its products to individual distributors at a discount, who then sell to end users for the full price. As the distributors sell more, they can rise up in the ranks and get better discounts. Einhorn probed the veracity of Herbalife's financial reporting, asking pointed questions about the actual sales to end consumers and the percentage of distributors that get promoted to supervisors.
Einhorn seemed to be implying that Herbalife's sales were not being reported accurately, as he had done successfully with a presentation explaining why he was shorting Green Mountain Coffee Roasters (Nasdaq: GMCR ) . He never even took out an actual short position on Herbalife, however, but shares still fell 30%. Einhorn made no such appearance on Herbalife's second-quarter conference call, and the company has adequately answered similar questions from the SEC, showing that this issue is likely moot. Still, shares have only barely recovered since the fall, indicating that this could be a strong buy.
Finally, there's Skullcandy (Nasdaq: SKUL ) , the young maker of headphones and other audio equipment is one of the most bet-against stocks in the market with 60% of its shares sold short. Its stock recently plummeted to near an all-time low at $11.84 when Morgan Stanley analyst Jay Sole said the company was losing market share to competing brand Beats by Dr. Dre and its average selling price had dropped. While those may seem like urgent concerns, Sole only downgraded the stock to equal weight and cut his 2013 earnings estimates by 10% to $1.40. Indicating the 17% loss last Thursday may have been overdone, the stock bounced back with a 10% gain on Friday.
After the drop, shares look underpriced with a forward P/E of 9.3 and 18.2% sales growth expected in 2013 on top of 28.7% this year. The audio specialist has beat earnings estimates in each of the last four quarters by 9% or more, and its products have been generally well reviewed on Amazon.com. At the current price, the bar seems unreasonably low. Another strong earnings report could send the stock soaring.
Foolish final thoughts
What's appealing about these stocks is that they seem to be undervalued not because of any fundamental flaw, but simply because of the perception of a certain group investors. While the doubts are different for each stock, the consequences are the same. A high short interest increases the likelihood of a short squeeze since we know that so many investors will have to buy back the stock, and the sustained pressure from the shorts means that a breakout quarter or another piece of bullish news could cause these stocks to skyrocket, as they've been turned into loaded cannons by the negativity surrounding them. As earnings reports start come out in October, keep an eye on these three for any sudden bounces.
Green Mountain investors, meanwhile, may be wondering what to think after the stock tumbled more than 80% from all-time highs. There are a number of concerns about the company but also several possibilities as shares have already bounced back, nearly doubling from recent lows. Get the scoop on the K-cup maker in our new premium report, which contains in-depth analysis from our retail sector chief on all of Green Mountain's opportunities and risks going forward. Even better, the report comes with a year's worth of free updates to help you make sense of every earnings report and any other new developments with this volatile stock. Just click right here now to get access to this exclusive report.