Why I'm Now Ready to Run With Crocs

I loathed Crocs (CROX) during this summer and fall, as trendy investors engaged in a feeding frenzy, inflating the price of the quirky shoemaker. I did not take joy in the stock's plunge, but I felt as if it was justified.

However, CROX is now an attractive prospect. After a massive, painful decline from $75 to $35, CROX had returned to earth from its lofty orbit. At that point, it was trading at a forward P/E of about 15 - cheap for such a high-growth stock.

Investing in high-growth niche stocks like CROX can be tricky, or even disastrous. [I briefly owned Heely's (HLYS), a similar, trendy shoemaker, selling eventually for a small loss.] Once a former high-flier like CROX falls, it's often hard to establish a floor.

But I decided to take a risk. I liked CROX at $35; I thought it was significantly oversold.

So when it was in the high $30's, I bought December 42.5 calls. I just closed the position today.

11/30/07 Bought CQJ LV Call Crocs Inc $42.50 Exp 12/22/07 $1.10

12/07/07 Sold CQJ LV Call Crocs Inc $42.50 Exp 12/22/07 $4.20

The stock certainly recovered nicely, bouncing up about $4, or 10% in one week.

After selling my $42.5 calls, I decided to reinitiate an options position, and purchased December $47.5 calls for $1.40/contract.

This investment, in my opinion, is attractive for two reasons; fundamentals, and momentum.

As I have previously discussed, CROX was ridiculously overvalued at $75. When it announced earnings, which weren't even bad, the expectations of speculators were crushed, and as Jim Cramer shouted "SELL" on Mad Money, investors dumped the stock. (That wasn't a direct shot at Jim, though he had been pumping up the stock on its way up. A panicked investor that sold on his advice would have not endured the full losses). CROX fell over $25 the first day after earnings, and continued its downward slide for another two weeks before stabilizing.

Now CROX has an attractive long-term valation. The shoes are still selling well, as consumers snatch up the trendy, colorful, albeit unusual clogs. During the last conference call, the company still called for strong growth, just not strong enough to justify a 40 forward P/E. CROX is also releasing clothing to compliment their product line, using lightweight material; if the clothing is as revolutionary (or intriguing) as the shoes, sales could become supercharged.

I usually wouldn't touch a stock if I didn't believe its long term prospects were respectable, so CROX passes that test. However, the real reason why I'm playing with some options is because CROX is (or was) a hot momentum stock. Now that CROX is well off its low (and up in 4 out of the last 5 sessions), individual investors who had sworn off CROX might be attempted to jump back in.

I don't think a valuation of $75/share is reasonable, but CROX still definitely has room to run. The average prediction of next year's earnings is $2.69/share. The current forward P/E is just 17, which I'd consider pretty low for a company expected to grow 40% next year and 26% over the next 5 years.

I'd start to find CROX a little overpriced with a forward P/E in the mid-20's. However, the stock still has lots of ground to cover before then. With a forward P/E of 20, CROX would trade around $54/share. Assuming a forward multiple of 22.5, that would make CROX a $60 stock.

My December options will expire too soon to enjoy all of CROX's potential price increase. But, even as a value-oriented, longer-term investor, I think CROX is an attractive buy-and-hold at this current valuation. CROX may be cold-blooded now, but I think it's going to bask in the sun.

Comments

[HarMegiddo:]

take my advice, don't make any trades or investments on jim cramers advice. he will squander your money like no other.

2007 Dec 10 06:59 AM

[firboy4:]

This article has nothing to do with Cramer! But I do agree that before we buy any stock that Cramer suggests we should do our own studying of it. What I do is to create a portfolio of Cramer's suggestions, dating it, and pricing it to see how it does.

As far as this article goes, I just read that CROX short % of float is 18.8%, quite high, so I tend to distrust any article on it. However, this one seems level headed and not so much hype.

2007 Dec 10 02:12 PM

[Stephen Fra...:]

First, the article was not intended to be about cramer - there was just a brief mention of him.

Secondly, if anything, the high percentage of short interest makes this an even stronger buying opportunity. Chances are, many of those short shares were sold on the way down. If CROX continues to creep back up, many investors may rush to close their positions, further driving up the price.

2007 Dec 10 07:57 PM