Turtle Beach Shorts Rewarded After Weak Forecast

More than three-quarters of HEAR's float is sold short

Mar 15, 2019 at 10:00 AM
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The shares of Turtle Beach Corp (NASDAQ:HEAR) are sinking this morning, after the headset maker said it expects current-quarter adjusted earnings to arrive below the consensus estimate. The company also said it was purchasing high-end computer accessories firm Roccat. This is offsetting fourth-quarter earnings and revenue beats, with HEAR down 15.9% at $13.66 -- headed toward its worst day since January 2018.

Analyst reaction has been quick, with Wedbush and D.A. Davidson cutting their HEAR price targets to $22 and $23, respectively. Overall, analysts are bullish on Turtle Beach, with all five in coverage maintaining a "strong buy" rating. Plus, the average 12-month price target of $27 is nearly double current trading levels.

Options traders appear to be upbeat, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), HEAR's 10-day call/put volume ratio sits at a top-heavy 3.87, meaning almost four calls have been bought to open for every put over the last two weeks.

While some of this call buying could be at the hands of traditional bulls, it's also possible shorts initiated options hedges against any upside risk. Short interest on HEAR stock spiked 35% in the two most recent reporting periods to a record 9 million shares, or almost three-quarters of the equity's float. These bears are sidelined today, though, with Turtle Beach on the short-sale restricted list.

Looking at the charts, HEAR shares are down almost 59% from their early August peak at $34.50. The stock breached its 200-day moving average in mid-December, while its 120-day moving average has emerged as a stiff ceiling in recent weeks. Today's drop has Turtle Beach on track for its lowest close since Christmas Eve.


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