Just as company goes through four stages during the business cycle-creation, growth, maturity, decline-a stock will also pass through similar phases. From startup to growth stock to value stock, as the underlying business changes the shareholder base does as well.
Although the pattern is predictable, the transition is seldom smooth. Many investors focus on a specific niche. Those who buy shares as a speculative trade are different from growth investors who view businesses differently than value investors. Each group has unique perspectives so when a stock is rotating from one shareholder base to another, opportunities arise.
An example of this rotation can be seen in Crocs (CROX). Its first year as a public company, the shares remained below $20. Then strong growth caught investors' attention and the shares raced from $20 to $74.75 in less than one year. When CROX disappointed growth investors, the hot money fled and the shares collapsed to $0.94 in November 2008.
Since then positive business developments have led the price higher. No longer seen as a bankruptcy threat, management has executed well and the business is improving.
Even in this weak market, CROX offers investors a strong technical backdrop and reasonable valuation. From a technical perspective, CROX trades above its uptrend (black line) and recently saw a consolidating triangle break higher. For the fundamentals, at 1 times sales and 2 times book, CROX is fairly valued and will move higher as business improves.
I first recommended that subscribers of EPIC Insights buy the shares on January 14 when the price was $6.71. With the shares closing Thursday at $7.33, we have a nice gain while the broad market has been heading lower. I maintain a $10 target (blue box) for this trade. With the moving averages climbing and the uptrend intact, CROX has been a strong point in an otherwise weak market.
Note: At time of this writing I own CROX.