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Tickers in this Article: HLYS, CSWC
I don't know about you, but I can't go to a shopping mall or a movie these days without seeing some kid wheeling past me at breakneck speed on those sneakers with the hidden wheels in the back.

Perhaps that's why the company that makes those things, Heelys (Nasdaq: HLYS), is doing so well. The company is expected to generate roughly a quarter billion in revenue this year, and garners an almost $1 billion market cap.

But despite the company's obvious success, I think that it may be time to bail. There are several things that lead me to believe that the stock may be nearing a top.

Recent press releases and SEC filings suggest that the company plans to sell roughly eight million privately held shares to the public. Roughly 5.2 million of these shares are said to be coming from Capital Southwest Venture Corp. which is a unit of the well-known Dallas-based venture capital firm, Capital Southwest Corp. (Nasdaq: CSWC). And the other roughly 2.8 million shares are said to be coming from company executives.

Remember That Saying About Rats and Sinking Ships
So what's wrong with the sell-off? Well, in one respect, nothing. After all, it's a great way for major stakeholders to diversify their holdings and to book some profits. And it's a smart way to sell shares in an organized manner rather than having the sellers try to unload their holdings in the open market on their own.

However, the timing seems off. If these players thought the stock could trade materially higher in the coming year, you'd think they'd hold onto it.

As an investor, this is one of those things you have to try to read into. And, while I may be incorrect in my assessment, I think that the fact that these "smart money folks" are selling might be a sign that the big gains are now behind us.

What Is Next?
The next thing that I worry about is that, although Heelys' sells a slew of products ranging from different makes and models of sneakers/skates, to skating helmets and snappy apparel, it may be hard to keep up that momentum.

It will be difficult to follow-up with a new product that has as much popularity. It's certainly something that every potential investor needs to remember, especially since there is a chance that the popularity of its sneaker/skate could be about to wane.

By the Numbers
My next question is the company's balance sheet. You see, while Heelys has minimal debt, which is good, its asset base is also relatively small.

If I add up its cash and equivalents ($69 million), its inventories ($10 million), its property and equipment ($952,000), its patents and trademarks ($473,000) and its receivables ($29 million), the total comes to just shy of $110 million.

If I then divide that number by the diluted shares outstanding (28.351 million) I'm left with roughly $3.88 a share in marketable assets. (Note: I didn't't include "assets" such as prepaid assets, "other assets" and deferred income taxes).

Frankly, that's not too impressive given both the company's share price ($36.34 per share), and again its nearly $1 billion market cap. In other words, what's there to protect the downside?

As far as earnings go, the company is expected to generate bottom-line numbers of $1.41 per share in 2007. In 2008, the current consensus estimate calls for the company to earn $1.68 per share, which implies just over a 19% expected growth rate. That's not bad, but again, at $36 and change per share and with a lack of future catalysts on the horizon, I'm not impressed.

On The Bright Side
Heelys continues to turn in decent quarterly numbers and that's been exciting to the investment community. In fact, earlier this week the company reported Q1 net income of 30 cents per share -- about a dime above what Wall Street had been calling for. Furthermore, thanks to the momentum in the business, management said that it expects its Q2 numbers to come in somewhere between 37 cents to 40 cents per share. Analysts had been expecting the company to earn 33 cents a share. Not bad.

In short, there is a chance that the company will continue to out pace expectations for the next several quarters, especially now that good weather is upon on us. This could continue to propel the stock forward.

The Bottom Line
Heelys has been quite successful at building out and marketing an extremely popular product. However, I question whether it'll be able to sustain its earnings if demand begins to slacken or another formidable player with a competitive offering enters the market.

Because of these reasons I'd steer clear of the stock. Frankly, I think that there are better opportunities out there.

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