Crocs: Patience Is a Virtue

Warren Buffett once famously quipped that his favorite holding period was forever. In a hyperactive market where investors are bombarded with streaming data, 24-hour business news, and constant investment ideas, it becomes difficult to remain patient and wait for opportunities to develop. Although I do not have the same patience as Buffett, I understand the need to allow ideas to work.

When I analyze a company, I research the operating business, study the financial statements, and prepare forecasts of how the business will perform in the future. By applying a discount factor which allows me to place a current value on a future event, I determine where the stock should trade. On the occasion where the fair value is below the current price, I can buy the shares and wait for the market to acknowledge the true price. Obviously, I prefer that the market act quickly so I can move on to the next target. However, future unknown events can greatly affect price, so patience is needed.

As an example of the power of patience, consider the performance of Crocs (CROX) over the past eight trading days. CROX is a narrowly focused company that produces very popular shoes. A one-time growth darling, CROX peaked at $74.75 in October 2007, and then crashed to below $1 in November 2008. As recently as two weeks ago, the stock had languished below $3.50-a price which was below book value and indicated the company was a dead man walking.

Having lost its growth-biased investor base, CROX was in an investment no-man's-land. The momentum crowd was gone and only the hardcore value players buying shares below book value remained on the scene. Considering that most of them had held the shares for nearly a year with little return, few new investors were buying the stock.

Then the catalyst occurred. With a better than expected earnings announcement and future forecast, CROX traded to near $6.90 yesterday and doubled in just over one week. Those who spent the time needed to understand the business and the balance sheet have been greatly rewarded as the market has finally recognized fair value. Looking at the position in their account each day for the past year was most likely frustrating, but in the end their patience paid off.

In a world where we are always encouraged to seek action and move money, CROX provides a valuable lesson. Over time, markets will eventually recognize fair value. However, the paths prices take are uncertain. When you buy a stock, know why you're doing so and identify which metrics validate your thesis. Always look for data that challenges your view, but never let impatience force you from trades. In a competitive environment, investors must allow their best ideas room to work. Failure to do so leads to hastily made decisions and sub-par results.

Comments

[Nyetnichevo:]

People also failed to realize certain cogent points. That Crox has a dominant position in the top 25 shoes sold on Amazon. Many of the models are not the ugly variety that most people associate with the brand. That Croslite is an amazing material that delivers both comfort and hygien, and is in their apparel as well. It's a very breathable substance and quite revolutionary. I know we are in a very challenging retail environment, yet I feel many consumers like myself still want comfort, style, and an occasional luxury item that is within reason. You don't buy a knockoff BMW, nor should you skimp on footwear. I own 4 pairs of Crocs and they are the most comfortable shoes I have ever owned. They give you "happy feet" and that's what I want after long days of being on them.
Also, have built a nice position in the stock as I see it well undervalued and certainly an acquisition target as you can be sure other brands have taken notice and would love the type of income stream Crocs can generate.

Aug 13 09:02 AM

[OldiesLover:]

Here Sean, This may be of interest:

seekingalpha.com/artic...


Thanks,

OldiesLover

Aug 13 09:59 AM

[Idiotbuster:]

Sean
Patience was irrelevant right to the day Crocs announced earnings last week. Before that, you can either be wiped out or pour cement over yourselves to help yourself muster right through it and see if you made it out ok. Pressure was intense then. There was no way of knowing whether Crocs had paid off the debt, reducing the inventory , boosting the cash until it was announced. Crocs could hve gone either way. If you were wrong, you get wiped out, simple as that. As for now, yeah, patience is now in vogue. You can count on Crocs for next two or more quarters at least. Crocs is now free to take out fresh debt for corporate needs anytime it wishes. There is still Alyce Lomaxes of Street.com heckling at Crocs.. You watch idiots cutting Crocs with scissors at youtube.com. You dont see anybody wearing them anywhere except possibly only at home? I am wearing them everyday for everyone to look at.. Nuts to them!

Aug 13 03:46 PM

[Camden:]

Re: "Those who spent the time needed to understand the business and the balance sheet have been greatly rewarded as the market has finally recognized fair value."

I agree with Idiotbuster. In November there was no way of knowing Crox would not go out of business. There was nothing in filings that indicated management had taken the necessary steps to stave off bankruptcy. Yes it worked out (so far), but there was no way to know it would until the announcement.

Aug 13 06:30 PM

[Camden:]

Re: "Those who spent the time needed to understand the business and the balance sheet have been greatly rewarded as the market has finally recognized fair value."

I agree with Idiotbuster. In November there was no way of knowing Crox would not go out of business. There was nothing in filings that indicated management had taken the necessary steps to stave off bankruptcy. Yes it worked out (so far), but there was no way to know it would until the announcement.

Aug 13 06:43 PM

[User 471379:]

Take a look at their growth in china. They are selling almost as much there as in all of north america over the same period and doing nearly as much business in 3 months this year in asia as they did in six months last year. Huge market, incredible growth and the cap is larger than all the finance websites are reporting. I see it at 10.50 before next year.

Aug 13 09:53 PM

[mcbowler:]

I made bank off of CROX. I bought only because of constant negative articles. It sounded like someone was paying them to trash the stock. There was a fairly high short interest (11%) and I thought even IF the company was doomed to fail, the president would still come out and say they would be profitable in the future. Shorts get squeezed, I make money, I wait the the next catalyst. Could be hype to push the stock up, or could be a technical level that indicates the stock breaking down. Im out for now, just watching it.

Aug 14 12:53 AM

[Lenny S:]

I just got back from Destin, FL last week. As I walked down the boardwalk to the beach I could not help but notice a long row of sandals, maybe 30 or 40 pair on both sides. These were left by people going to the beach. I kid you not, almost every pair was some type of Crocs. I had no idea they had some many different designs. Alot of them were very cool looking. I keep hearing the talking heads say it was only a fad and they are dying out but you sure can't tell it what people are wearing. I had to ask one lady if she like hers and I got a testimonial. Lenny / Dallas, TX


On Aug 13 09:02 AM Nyetnichevo wrote:

> People also failed to realize certain cogent points. That Crox has
> a dominant position in the top 25 shoes sold on Amazon. Many of the
> models are not the ugly variety that most people associate with the
> brand. That Croslite is an amazing material that delivers both comfort
> and hygien, and is in their apparel as well. It's a very breathable
> substance and quite revolutionary. I know we are in a very challenging
> retail environment, yet I feel many consumers like myself still want
> comfort, style, and an occasional luxury item that is within reason.
> You don't buy a knockoff BMW, nor should you skimp on footwear. I
> own 4 pairs of Crocs and they are the most comfortable shoes I have
> ever owned. They give you "happy feet" and that's what I want after
> long days of being on them.
> Also, have built a nice position in the stock as I see it well undervalued
> and certainly an acquisition target as you can be sure other brands
> have taken notice and would love the type of income stream Crocs
> can generate.

Aug 21 09:25 PM