There is no justifiable reason why anybody would be buying Crocs, Inc. (CROX) at these enormously inflated levels. After all, their core sales are derived from an extremely unfashionable, yet somehow popular foam-like material. The current popularity of the company's footwear begs one question – are current growth rates sustainable? The answer, plain and simple, is No.
Although we cannot argue the impressive progress the company has made until this point, there are several indicators suggesting CROX has reached its peak and will soon begin its downward descent. First and foremost, we should look to insider activity for the sentiment the VIPs at the company have. You will notice that not only have insiders been shedding shares since late last year, but the amount of insider selling in the last few months has more than doubled.
Apparently, insiders are not the only ones that think this growth is unsustainable as nearly 20% of the entire float is held short. More importantly, the run the stock has seen over this past month is artificially inflated, as a number of meaningless press releases have forced short sellers to run for the exits. Just a month ago, nearly 60% of the float was held short, suggesting that this latest run was solely based on a short covering rally, rather than an actual improvement in fundamentals.
The latest news from the company involves their launch of men's and children clothing lines that are manufactured from a similar material as the clogs they sell. What? Can you remember the last time you had the desire to wear a rubber t-shirt? We didn't think so. This is the company's attempt to diversify their business, so their numbers are not solely based on sale of shoes that nothing more than a current fad.
Further, with the winter soon approaching, it is unlikely that people will be actively seeking shoes that have holes in them. Sure the material they use is water proof, but what good are they when there are holes in them to let water seep right in. We anticipate that the popularity of these shoes will not continue.
When this fad is finally played out, not only will consumers be tossing their Crocs in the dumpster, but the stock will be joining them there as well.
Disclosure: Author has a short position in CROX
