Best Short Squeeze Candidates- Our favorite one Leap Frog (LF)

A common method of getting alpha, out-performance, on your stock portfolio is to ride some short squeeze candidates higher. Beware, most of these stocks merit their short interest.  Many are troubled, or severely overpriced, and are ripe for a fall.  But sometimes, you find that rare nugget that defies the skeptics and watch out. That’s when you get the tiger by the tail.

One company that we own and think is a great value and franchise and that the shorts have it totally wrong is  Leap Frog, the maker of the iconic Leap Pad educational toy. Currently the short position represents 20.70% of the float with 5.3 days to cover.  The basic short thesis is that the proliferation of tablets and competitors will obsolete and degrade the margins of the proprietary Leap Pad platform.  I think just the opposite is about to happen.  The enormous unanticipated success of the tablet form factor has turned what was once a “toy, kid’s device” into something that every child now wants to mimic his parents.  As a parent, ask yourself, do you want your child dropping your iPad on the floor and surfing the internet unfettered.  Of course not, you’ll buy him his own.  Well maybe, but why do that, just get him a Leap Pad for a lot less.  The latest quarter seems to confirm my thesis.  Sales were up 28% and they dominated the top-selling list in the toy categories.  Product was sold out in Walmart and Toys r Us.  Company is debt free and has a $120 million cash on their books.  I don’t know what the catalyst will be to change short seller’s obvious misconceptions but then again, catalysts just have their way of arriving when least expected.  Analyst day is coming up on February 12.  Short sellers get nervous.  You are wrong.