Zagg: Dog or Just an Underdog?

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars, we've also got investors who find the chinks in a company's armor and correctly call its fall. We call them "Underdogs" if they've earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today I'm looking at smartphone accessories maker Zagg (NASDAQ: ZAGG  ) , which lost nearly half of its value after it was revealed that its former CEO had margined more than half his company stock and abruptly resigned. With allegations charging the company had launched a secret campaign to replace him before the brouhaha became public, the stock has never really recovered and continues to trade lower today. Investors remain wary, so there's little wonder the accessories maker carries the lowest CAPS rating of one star.

Admittedly, it's been a long ride down, so if there are any CAPS players who've scored big by correctly predicting this stock will fail, it may be worth our while to check out those they think will ultimately succeed. And CAPS All-Star wolfersmith is one who's earned the underdog moniker and recently predicted Zagg would rout the shorts.

Zagg snapshot

Market Cap

$222 million

Revenues (TTM)

$244 million

1-Year Stock Return

(17.7%)

Return on Investment

(14.9%)

Estimated 5-Year EPS Growth

23.8%

Dividend and Yield

N/A

Recent Price

$7.24

CAPS Rating (out of 5)

*

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; Zagg doesn't pay a dividend.

Of course, not every short-sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs, so it's important to do your homework.

A scary opportunity
On one hand, Zagg has a lot going for it. Its core line of products is tied to Apple's many i-devices, which up until just recently, anyway, were a surefire sales machine. It bolstered its business by acquiring iFrogz, which expands the product category to higher-end headsets and earbuds, and it just announced a deal with Tech Data (NASDAQ: TECD  ) to provide the distributor of IT products and services with the full range of products for its 60,000 clients. With Wal-Mart added to the roster of retailers selling Zagg's invisibleSHIELD as well as a push into the gaming market, there's a lot of heady optimism for the future.

Unfortunately, that's about as far as it goes. Zagg's products are commodities facing a host of competitors from Best Buy's Rocketfish and Logitech to next-gen protective technology coming out of Corning and GT Advanced Technologies. My own iPhone is protected with an OtterBox case. The move into the earbud market is merely a sideways step, another commoditized niche where Skullcandy can't gain traction and has to resort to steep price discounting to move product. With Apple offering its own improved earbud, the hits keep coming.

Moreover, as its indirect channel sales program expands at retailers such as Best Buy, Staples, and Target, we're likely to see margins compress, particularly with Wal-Mart added to the mix. The indirect market now accounts for 83% of revenues, up from 79% in the previous quarter, and margins slipped 100 basis points to 45%.

A smaller piece of the pie
While management points out the mobile-computing accessories market this year will be a $20 billion business and growing to $60 billion by 2015, demand for the iPhone 5 is much weaker than anticipated. Now that Zagg is mired in lawsuits and investigations, the field is open for peers like OtterBox to make timely acquisitions. It recently wrapped up Wrapsol, which makes screen protectors for handsets, tablets, and laptops.

I continue to believe the accessories maker is a dog, but let me know in the comments section below why you don't think investors will gag on Zagg.

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Read/Post Comments (14) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2013, at 4:51 PM, techtitan13 wrote:

    Zagg is the preferred brand for electronic accessories. There's a reason all the major retail outlets carry their stuff. Sure, it's a crowded market, but nobody else has the distribution channels Zagg has.

    Getting your product on the shelf is the hardest part and Zagg has already done that.

    And they're not just an Apple accessory maker. They make accessories for every major brand.

    Their keyboard for the ipad is best in class hands down.

    Shorts will be proven wrong on this one. Earnings come out in a few weeks and I think you will see a move similar to that of Netflix (another stock the shorts got carried out feet first on).

  • Report this Comment On January 29, 2013, at 5:31 PM, khaledmrd wrote:

    more competition for Zagg

    Logitech just announced during last week CC, it is going to announce new tablet products coming out soon as we see more and more tablet products,

    a new Logitech team in China already active for faster more tablets products & offer products for different sizes of tablets and expecting that consumers are going to use them for different functions

    another Logitech CC in 2012 mentioned Desktop class accessories for tablets

  • Report this Comment On January 29, 2013, at 5:48 PM, DaveD1970 wrote:

    Don't forget their controlling stake in HzO! HZO just recently announced its partnership with a Chinese company providing water block technology to aftermarket products. Also two companies already have the HZO water block technology in place on their smart phone and On a navigation compass watch. Spoke to their team recently via email and they have several US manufacturers that they're working with To roll out their water block technology. When this becomes stronger in the market Zagg is positioned to profit huge!

  • Report this Comment On January 29, 2013, at 5:50 PM, techtitan13 wrote:

    Logitech is junk. Low end accessories for the low end consumer. Zagg focuses on the business professional and the high end consumer.

  • Report this Comment On January 29, 2013, at 7:53 PM, tjcfirebird wrote:

    I found this on a yahoo board:

    RANDY HALES, COO and President: My sense of Randy is that he is a good fit for the company at this stage. He is passionate, professional and sober minded. He is a ‘hands on guy’ making much of the analyst presentations himself. He is more concerned about mid and long-term direction, sustainable growth and consistency of company performance than a quick homerun. He also feels that the company can achieve very strong organic growth but is not adverse to the right acquisition.

    STOCK BUY-BACK AND WELLS FARGO REFINANCE: The company is in a black out period until earnings release. After that they file an amended 8-K and can begin a buy-back immediately. I get the sense they are itching to start because they believe the stock price is cheap. The $84M Wells Fargo refi is the best endorsement of their financials you can get. The CFO is still smarting from the experience.

    HZO: ZAGG owns about 37% of HZO at this time. Randy’s attitude is if something good happens there it is simply a bonus.

    ZAGG RETAIL STORES IN UTAH: These are legacy stores opened by the ex-CEO. The company said they will be evaluated and appropriate decisions will be made.

    Best Buy: As was already posted here, BBY had surprisingly good numbers but what you may not know is they have opened a number of smaller venue stores focused on mobile electronics and that is helping ZAGG. Also when I asked how BBY receivables were doing, the answer was okay but they did begin wisely insuring BBY receivables for the first time.

  • Report this Comment On January 29, 2013, at 7:54 PM, tjcfirebird wrote:

    continued:

    PRODUCT DIVERSITY AND REDUCED RELIANCE ON INVISIBLESHIELD:

    invisibleSHIELD now represents less than 50% of sales. Zagg revenue has grown from $2M to $250M(est.) in 5years. This means they are doing $100-150M in non-shield product. They have clearly rounded out and filled in their product offering. They are innovating and creating in-house.

    The new iOS game controller could be a huge hit. It is very portable, collapsing to the footprint of the iPhone 5. They obviously need developers to sign on and are wisely hunting with a harpoon rather than a net and going after the major developers such as EA and Epic whom have offices down the street from Zagg in Salt Lake City.

    The Boost NearFA technology is also promising . No pairing like Bluetooth. Simply set an AV device on top and it communicates. The new Origin line of speakers as well as the Animatone children’s line is utilizing this. They also introduced ZAGGSPARQ Portable Power Chargers ZAGGstylus for touch screens in addition to a boatload of new headphones and earbuds.

    CONCLUSION: I left CES feeling even more confident about ZAGG. I was also very much aware while wandering the show how crowded the space is for mobile accessories of all sorts. ZAGG has some critical mass and should be able to capitalize on their brands. There remains a huge disconnect between the stock price and the performance of the company. A regression to the mean puts the stock price back at $15 short term and there are plenty of catalysts – good earnings release, stock buy-back, new institutional investors and of course, a short squeeze. Please feel free to ask questions.

  • Report this Comment On January 29, 2013, at 7:59 PM, tjcfirebird wrote:

    The Motley Fools continue to trash ZAGG. I believe they short the stock or are just paid short and distort bashers.

  • Report this Comment On January 29, 2013, at 8:06 PM, tjcfirebird wrote:

    As earnings time approaches for Zagg, the trash talkers come out of the woodwork ,just like clockwork every quarter! LMAO!

  • Report this Comment On January 29, 2013, at 11:57 PM, Freeman2014 wrote:

    Of course you are financially motivated to try and trash ZAGG here. But at least you should state facts. In fact, your first sentence simply isn't true! The majority of the stock price dropped at the beginning of August, which was BEFORE the former CEO resigned. Which was incidentally AFTER the company reported another record quarter. In addition, there was no company rule about having a margin account nor obligation to report it. Nor a conspiracy. He probably left because he was tired of crap like this.

    ZAGG is undervalued and continues to perform. Only time will continue to prove the naysayers wrong as the global brand continues to grow.

  • Report this Comment On January 30, 2013, at 2:52 AM, revealedin71 wrote:

    ZAGG is a #1 rated stock at Zacks...It is interesting to see the polar-opposite evaluations

    between these 2 large firms. A lot of the disparity appears to be the eternal battle between growth and value investors. However, in this case, my own evaluation comes up with ZAGG having a foot in both camps. As such, I recently added ZAGG to the portfolio.

  • Report this Comment On January 30, 2013, at 5:54 AM, tjcfirebird wrote:

    Read the writers profile. He's an ex police officer with no financial background. Do they just let anybody write these things?

    Sentiment: Strong Buy

  • Report this Comment On January 30, 2013, at 2:47 PM, will1946 wrote:

    I don´t really understand why during the past few months or so zagg and skul are suddenly dogs. I mean, are they not two of the best-known makers of accessories?

    Apple making earbuds doesn´t sound like much competition. Both zagg´s and skull´s products are well-priced. I guess I simply don´t see why these companies are so out of favor.

  • Report this Comment On February 01, 2013, at 11:10 AM, okkarma wrote:

    More proof that the stock market is rigged. Complete losers can post articles like these that are only written to manipulate the prices downward and make money off of the true investors by shorting a stock like ZAGG.

  • Report this Comment On February 01, 2013, at 8:07 PM, biggbear77 wrote:

    while peripheral and accessory companies are volatile businesses, they can be excellent growth vehicles when products/brand clicking with consumers. zagg is in its rapid growth stage. zagg is an innovative company with excellent products and the broadest distribution. customers and retailers all say good things about the company and its products.

    i see a stupid cheap stock with strong fundamentals being hurt be a bear raid. if the company makes the numbers, the stock will soar 30% in a few days as shorts scramble to cover.

    if they make street estimates for 2013, the shares could double. here is a situation where the business must implode in the next few weeks or the stock will rally hard.

    draw your own conclusion and place your bet. i did. i am long.

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