Trade Alert – ZAGG when others zig

Last week, I got an email from a good friend and the best value investor I know on his latest cheap stock pick, and when a guy with Robert Marcin’s record talks, I listen.

Here’re just a couple of examples of why:

Long-time readers may remember that we bought Seagate Technologies (STX) just more than a year ago, in January 2012, when Marcin was pounding the table.  The shares were at about $18, and Marcin wrote, “Every once in a while one my deep value style comes across a name that is compellingly cheap despite a big move and a good chart. Seagate is that stock, right here right now.”  We bought some calls and just three weeks later, STX was trading in the high $20’s.  I sold some of those calls for a more than 500% return.  In three weeks.

Here’s another example of Marcin’s excellent instincts.  In June of 2008, shares in Crocs, Inc. (CROX) had fallen to around $8 per share, from a high of more than $75 per share in late 2007 and Bob told me to get long.

You can watch a clip of me recommending the stock on my TV show and in the precursor to the Revolution Investing newsletter on YouTube called, “Fox Happy Hour Cody’s Big 3: XM!, Trend Rally, CROX” –

Note the market call I made there about the Counter Trend Rally — caught that right, but more importantly, I was right to stay bearish as the markets were indeed topping there as I suggested at the time. Revolution Investing In Motion. (New tagline now that Research In Motion is actually dead?)

Here’s what Marcin wrote back then:

It took some time—we all know what happened to the market in late 2008—but by summer of 2011, Crocs shares were selling for more than $30.  They’ve pulled back some since then, but even shareholders who missed out on selling for the quadruple still have a near-double on the books.  So like I said, when Bob Marcin talks, I listen.

Bob’s now pounding the table on Zagg, Inc. (ZAGG).  Zagg makes mobile device accessories, including keyboards, cases and protective films.  More recently, at the Consumer Electronics Show, Zagg unveiled a new mobile gaming controller for iOS products (more on that below).

Bob’s note to me said that the “stock is down, oversold and stupid cheap.”  He says the company’s new CEO (Randy Hales) has a great record building consumer products and Marcin’s looking for a beat when Zagg reports earnings in two weeks.  He also said, “Intermediate term financial goal $1 billion sales, with current margins, that means $3+ EPS.  If achieved, stock at $36-$45, IMHO.”

Whoa.  ZAGG’s at just more than $7 right now, which means if Bob’s analysis is right, we’re talking a five- to six-bagger.  So, I crunched the numbers and did some of our Revolution Analysis:

Adjusted for about $24 million in net debt, the enterprise value per share is about $8 per share, or 8.2x 2013 earnings and 0.8x revenue.  Earnings are expected to grow by 31% this year, to $0.97 per share.

Shares in Zagg tanked last August after the company’s (then) CEO Robert Pedersen stepped down, and the company also revealed that the executive had sold more than half a million shares in order to cover margin calls (Pedersen still owned more than 3 million shares.)  There were concerns that Pedersen was speculating in the stock and a class action lawsuit was initiated.  Zagg’s earnings that quarter actually met expectations, but apparently the Street was looking for higher guidance going forward, which the company did not offer.

Zagg’s third quarter earnings beat expectations by a wide margin.  Sales jumped 30%, the gross margin expanded by 210 basis points, to 44.5%, and at that point the company did increase full-year guidance for sales.  The stock, however, after an initial pop, has continued to languish.

What I really like about ZAGG, after doing my own analysis, is the product pipeline and the new products intro’ed at CES last month, especially the iFrogz Caliber Advantage gaming controller.  The device was a CES Innovations Design and Engineering Award honoree, and it’s an open development platform.  The device will provide a “console-style gaming experience for their iPhone 5 or iPod touch.”

“The Caliber Advantage is an analog game controller and case, providing 360-degree motion control with viewing options in both portrait and landscape. Gaming action is made possible through Bluetooth^® 4.0 pairing and dual, left and right slide-out controls that feature responsive keys for an accurate, high-quality gaming experience. Available in the first half of 2013 for $69.99, the Caliber Advantage will also feature an integrated lithium polymer battery offering 10-12 hours of continuous play without the need for a charge.”

Cool.  Gaming apps are among the most popular apps, and I think gamers will spend $60 in a heartbeat to make the phone/gaming experience better.

Zagg also debuted a line of accessories for children that includes plush toys which amplify sound for $50, volume-limiting earbuds and headphones and a protective iPad case.  Zagg’s Origin desktop speaker system won the Gotta Be Mobile “Best Accessory” at CES 2013; it will launch this spring, for $250.

Like Marcin, I also like the fact that Zagg’s revenue has been more than 90% U.S. based—that leaves a ton of upside as Apple products grow internationally.  Finally, Zagg has a new distribution deal with Tech Data, refinanced its debt in December and also announced a share repurchase program.  About one-third of the shares outstanding are sold short right now—that means if the company does beat, a short-squeeze could ensue.  But even if it doesn’t, we’re looking at Zagg as a long-term value play—that’s what Marcin’s known for and that’s how we’re going to think of this investment.

In order to make room for Zagg in the portfolio, we’re selling Nuance today.  The company disappointed and I’m unhappy with where things appear to be going.  Time for greener pastures. I’ll be selling all my Nuance position and I’ll be adding a first tranche of Zagg common stock today, about 1/3 of the position I’ll be looking to build over the next couple weeks. Let you know each time I add to it from here.