These Small-Caps Could Ride the iPhone 5 to 100%-Plus Gains

Apple changed the size and shape of the iPhone compared to previous models. This means old cases won't fit the new phone. They also changed the power plug so old docking devices no longer work with this phone. So traders should focus on the fact that there are now 5 million new customers for iPhone accessories.

One of the biggest upgrades for the new iPhone is the retina display, a screen that displays images with a high level of detail. Users of any smartphone know that dropping their phone, something that happens to everyone, often damages the screen. For typical cell phone displays, this might not matter much, but new iPhone users seem very likely to apply an inexpensive screen protector to their very expensive phone.

One of the leading screen protector providers is Zagg (NASDAQ: ZAGG), which makes other smartphone and tablet PC accessories as well. ZAGG's management reports that they are the biggest player in this sector with a market share of about 18%, which is nearly twice as large as their nearest competitor. Sales are expected to grow about 38% a year for the next three years, and analysts expect earnings growth of more than 26% a year.

ZAGG is trading at about 11 times current earnings and 8 times next year's estimated earnings. The low price-to-earnings (P/E) ratio may be related to a class action lawsuit the company is facing. The former CEO pledged a large number of shares as collateral for personal loans and the Board of Directors moved to replace him because of it. The details will come out in the eventual settlement, but class actions are generally resolved without serious harm to a company. ZAGG should rebound when this is settled or even before then.

The chart shows the impact of the bad news and allows for easy identification of a resistance level near $11. Earnings are slated to be announced on Nov. 12, and that news could push the stock price up.  (more)