Buy, Sell, or Hold: Zagg

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether its possible upside outweighs its risks. Let's take a look at Zagg (NAS: ZAGG) today and see why you might want to buy, sell, or hold it.

Buy
One factor in Zagg's favor is the business it's in: It makes and sells accessories for consumer electronics and handheld devices. Think protective covers, earbuds, portable batteries, chargers, keyboards, and more, for the likes of cell phones, tablets, laptops, digital cameras, gaming devices, and even, among other things, military helicopter blades. Many of these product categories are selling briskly, and that bodes well for Zagg.

For example, 67 million tablets were sold worldwide in 2011, and the market is expected to grow by 39% annually through 2015, according to Transparency Market research. Smartphone sales in 2011 surged by 67% over 2010 levels, totaling 470 million. They're expected to top 1 billion in volume in 2015. Tech giant Apple (NAS: AAPL) is arguably the biggest force driving this trend, and fortunately for Zagg, the company has a plethora of iPhone- and iPad-friendly cases and protective technology.

Another good reason to buy into a company is when there's a catalyst on the horizon that can take it to a higher level. Zagg hasn't been selling its wares in Wal-Mart (NYS: WMT) -- but if it ever does, it's likely to see sales rise considerably. There have been rumors that the two are in talks following the 2012 Consumer Electronics Show. On the other hand, Wal-Mart isn't known for yielding robust profit margins to its suppliers.

Sell
You might be thinking of selling Zagg, but lots of investors already have sold shares of Zagg -- short. Not too long ago, it was one of the most heavily shorted stocks on the market, with more than half its shares sold short. There can be an upside to a heavily shorted stock: If the company does well and the stock starts a strong upward climb, a "short squeeze" can result, with many shorters covering their positions by buying shares, which will drive the share price up even more. But that doesn't always happen. Many times, these bearish investors are on to something, paying attention to red flags.

One worrisome thing is the concentration in its sales channels. Best Buy (NYS: BBY) , for example, generates a big chunk of Zagg's revenue. That's great, but if Best Buy imposes some onerous terms or the companies have a falling out, Zagg will take a big hit. Best Buy itself hasn't been in the best of health, competing with Amazon.com (NAS: AMZN) and other retail outlets. Fortunately for Zagg, it also sells products on Amazon.com, but the 28% of sales it receives from Best Buy could be a huge anchor as Amazon continues to crush the retailer.

Another concern is that of competitive advantages. Zagg doesn't have the luxury of many barriers to entry for potential competitors, at least with some of its offerings. It's hard for a new airplane manufacturer to emerge, because of the huge capital investments, among other things. But it's far easier for a newcomer to develop a protective covering for a handheld device. And some competitors are deep-pocketed, with exceptional marketing and distribution strengths. Apple, for instance, also sells its own covers for its many products.

The company's inventory numbers aren't heartening, either, with items seemingly staying on shelves longer as inventory turns and days-in-inventory figures rise.

The folks at Citron Research came down very negatively on Zagg in July: "ZAGG is presenting an intentionally distorted financial picture of its current business, playing word games while flirting with outright fraud. Citron predicts that ZAGG will not experience the explosive growth that management and the analysts project for the future, and the retail investors piling in now as its enterprise value approaches $500 million will take huge losses as a consequence."

Citron may or may not end up proven correct, but its cautions are worth considering.

Hold
If you're not convinced to buy or sell, then just hold off. Perhaps give the company time to prove itself more, diversifying its distribution channels and posting continued growth.

The verdict
Though Zagg has its appeal, I'm not rushing to buy shares. There are plenty of other exciting candidates to consider for our portfolios.

These question marks may make investors uneasy in the long term. If you're looking for more promising investments, check out "5 Stocks with Explosive Potential" and "4 Stocks as Cheap as They've Ever Been." You can download this special free report today.

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you can follow on Twitter at@SelenaMaranjian, owns shares of Verizon Communications, Apple, Wal-Mart Stores, and Amazon.com, but she holds no other position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of Best Buy, Apple, Wal-Mart Stores, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Wal-Mart Stores, Amazon.com, and Apple, creating a bull call spread position in Apple, creating a diagonal call position in Wal-Mart Stores, creating a write naked calls position in Zagg, and writing covered calls in Best Buy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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