1-Star Stocks Poised to Plunge: ZAGG?

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, handheld device accessory specialist ZAGG (Nasdaq: ZAGG  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at ZAGG's business and see what CAPS investors are saying about the stock right now.

ZAGG facts

Headquarters Salt Lake City, Utah
Market Cap $296.6 million
Industry Specialty retail
Trailing-12-Month Revenue $94.34 million

Chairman/CEO Robert Pedersen, II

CFO Brandon O'Brien

Return on Equity (Average, Past 3 Years) 45.8%
Cash/Debt $1.8 million / $4.2 million
1-Year Return 405%
Competitors Apple (Nasdaq: AAPL  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 24% of the 228 members who have rated ZAGG believe the stock will underperform the S&P 500 going forward. These bears include All-Stars Rich Duprey (TMFCop) and metoo105, both of whom are ranked in the top 10% of our community.

Just last week, Rich brought a few red flags to our community's attention: "Inventories are rising faster than sales and finished goods are growing nearly five times faster than sales. Seems like a warning sign that sales growth may sputter."

In fact, ZAGG currently sports a forward P/E of 17. That represents a premium to Apple (11), whose SmartCover now competes directly with ZAGG, as well as Motorola Mobility (NYSE: MMI  ) (15) and Research In Motion (Nasdaq: RIMM  ) (4).

CAPS All-Star metoo105 elaborates on the ZAGG bear case:

Ask yourself, why is 50% of this stock's float sold short?

My guess is that pretty much everyone who has piled on short here is simply thinking about Porter's five factors and how there just aren't any moats to this business. The 50% gross margin is unbelievably high. It's even higher than Apple's 40% and Apple has monopolistic pricing (from its IP).

Competitors will finally commoditize Zagg's products. Consumers will win; Zagg will lose.

What do you think about ZAGG, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple, and The Fool owns shares of it. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

Read/Post Comments (5) | Recommend This Article (1)

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 June 22, 2011, at 3:01 PM, CVMp wrote:

    Well, one day after this warning article, ZAGG is up about 20%


  • Report this Comment On June 22, 2011, at 4:08 PM, kokilananda wrote:

    how you like me Zagg now ?

    $18 stock by friday.

  • Report this Comment On June 22, 2011, at 5:49 PM, ROEoutshinesGOLD wrote:

    Looks like ZAGG is not plunging just yet. Actually, it seems to be up by 18.54% today.

    As for the moat around the business. If my memory serves correctly, there's some patents that they own on the unique application process involved in installing the invisibleSHIELD as well as the invisibleSHIELD it self.

    I must also remind you that this is not your cheap, "Generic" clear film that you slap on your phone for scratch protection.

    invisibleSHIELD is an incredibly durable film that features "self-healing" properties.

    Finally, I'd like to point out that their Gross Margins are so healthy because they sell something that is incredibly cheap in raw material form. (Obviously, right?) It is nothing more than a roll of patented, clear, plastic that is cut precisely to fit different models of smart-phones.

    I'm not sure how anyone can compare Zagg's main product to Apple's main product and be surprised that they have different margins.

    You would not compare KO to AAPL right?

    Actually, invisibleSHIELD is a lot like Coke. This plastic film is essentially a patented commodity much like the Coca-Cola and it's sugar-water.

    What about the similarities in research and development costs?

    KO does not have to spend much time and money doing R & D. Well, neither does ZAGG. At least not for their invisibleSHIELD. The research required to manufacture a new model of invisibleShield should not go any further than accurately measuring the dimensions of the new gadget or a smartphone.

    Zagg compares favorably to other "cover" manufacturers as well. Anything that is not made out of thin, flat film is going to have unfavorable margins when compared to ZAGG.

    Another advantage for ZAGG is that it is not easy to match the speed at which they can bring new shields to market when new devices are launched. Usually they have their product ready by the launch day of a new device. That's because all they need is the new dimensions and they can start cutting their "new" product from rolls of plastic film available at hand. In other words, they are not dependent on Chinese manufacturers for absolutely everything.

    I have some concerns about the inventories too but that was covered during last earnings call. We will see how that develops but right now I'm not concerned.

    Today they announced that they have bought iFrogz and I don't think that it is going to be as profitable for them as the invisibleShield (reasons mentioned above).

  • Report this Comment On June 23, 2011, at 8:51 PM, mhonarvar wrote:

    nice timing lol

  • Report this Comment On August 13, 2011, at 1:27 PM, biotecher73 wrote:

    Do your foolish research! Zagg has a patent on optical grade polyurethane. This gives them a market edge on a low cost product that everyone needs.

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