If you think back to your school days, you may remember a kid or two who constantly had their hands raised and contradicted the teacher at every opportunity. The kid questioned everything, to an irritating extent: Why couldn’t they just accept what they were being told and move on?

#-ad_banner-#However, I usually had another thought that crept into my mind. What if they were right about everything? Could they really be that much smarter than everyone else?

Years later, you might still hear that same kid’s voice, contradicting your investment ideas and your research — only this time, that kid is known as something else… a short seller. 

Short sellers have the reputation of being smarter than everyone in the room. Wall Street calls these investors the “smart money” because of the presumption that they must have sophisticated knowledge to predict when a stock is going to fall. 

It doesn’t necessarily make them right, though.

Shorting a stock is a dangerous game, which is why only the “smart money” usually engages in it. If the stock begins to rise, short sellers will have to cover their positions by buying stock, an action that puts upward pressure on an already rising stock. This effect is known as a short squeeze. 

Look at what happened with Tesla Motors (Nasdaq: TSLA). Over 20 million shares were shorted before the stock finally made its move north in early 2013. Even with the price now above $200, there are still over 25 million shares still being shorted — and yet, most analysts still expect the stock to climb even higher. 

So short sellers may have the advantage when it comes to short-term plays, but they tend to miss out on the big picture. Value investors look for unpopular companies with long-term fundamentals that will generate much higher returns over the span of several years or more. 

With that theme in mind, I’ve found a heavily shorted stock with long-term potential and global reach whose initiatives that won’t even come online until 2015.

The company is Iridium Communications (Nasdaq: IRDM), the second-largest provider of satellite telecommunications and the only one with service than spans the globe with its 66 low-orbit satellites. Operating in an industry with a high barrier to entry, Iridium has a wide moat and trades at extremely low valuations — perfect for savvy value investors.

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	© Iridium Communications Inc.
	Iridium Communications is the second-largest provider of satellite telecommunications. The company has a wide moat in its industry and trades at extremely low valuations.

IRDM’s short float is over 22%, which makes trading volatile, but it’s during the next 18 months that the story will play out. Iridium’s NEXT satellite launch, planned in 2015, will expand the company’s operations and attract other data providers. 

Case in point, the world’s first global air traffic surveillance system is scheduled to be deployed through the NEXT satellites with Aireon signing a deal in December that will pay Iridium $200 million in fees for its hosting services.

From a fundamental perspective, Iridium looks like a classic value stock. It trades at just 7.5 times future earnings and has a PEG ratio (the price-to-earnings ratio divided by earnings growth) of just 0.70. It has plenty of cash on hand with $186 million while total current liabilities are around $101 million giving the company plenty of flexibility. 

Iridium trades at a big discount to its book value of around $12.20 as well — more evidence that Wall Street may be greatly undervaluing this company. 

Insider activity is alive and well, with plenty of purchases lately. In the past three months, 17,350 shares were bought, while only 3,076 were sold. Strong insider buying is a good sign that management has faith in the company. The largest institutional holder of IRDM, hedge fund Royce & Associates, has increased its stake from $10.4 million in September to over $12 million as of March.

Risks to Consider: The heavy short ratio in the stock could create strong short-term volatility. Additionally, the risks associated with launching a satellite are difficult to measure and could impact future valuations. 

Action to Take –> Analysts expect Iridium to earn $1.30 a share in 2015. Considering that the stock is trading around $7 a share, a fair-value estimation using 2015 expected earnings puts the stock price at $12 — a potential 71% gain.

P.S. If you think short sellers are wrong about IRDM, my colleague Michael Vodicka has an investing strategy for you. He’s found a way to multiply the income from the world’s most reliable dividend payers — without owning a single stock. Click here to learn more.