Cramer: Sell These ‘Over-Hyped’ Names
The greater the hype, the greater you need to remain skeptical about the underlying company, Cramer said Friday. And he thinks that’s certainly true when it comes to ZAGG and Skullcandy.
ZAGG makes scratch protectors for devices like smartphones and Skullcandy , which went public over the summer, makes headphones that are used for portable media players and smartphones. Both are pegged as smartphone plays, but they don’t make any smartphones.
“ZAGG and Skullcandy sell ancillary products that are ridiculously easily to duplicate … so there's nothing stopping potential competitors from coming in and tearing either of them to shreds,” Cramer said.
Both companies also have serious customer concentration issues. ZAGG got 41 percent of its sales from Best Buy last year and doesn’t have a long-term contract with any retailer. Skullcandy gets 10 percent of its sales from Best Buy and 10 percent from Target.
What’s more, Cramer sees evidence that business is faltering. In Skullcandy’s first quarter as a public company, it gave guidance that was lower than published estimates. In the latest quarter, its margin declined by 450 basis thanks to higher product costs. Meanwhile, ZAGG has seen its inventories rise rapidly in a business that does have a need for a lot of inventory.
“ZAGG and Skullcandy are way, way too dangerous for you to own,” Cramer said, “and they both should be sold into any strength.”