Crox in Freefall: Will It Land in the Bargain Basement?

Crocs (CROX) is on another free fall, down nearly 10% yesterday morning.The main news, appears to be a story on Forbes.com Friday after the close of the market of dispute of their patent in Europe. While if this held up, it would not be great for the long run in Europe; Crocs is already being 'copied' all over the world with cheap knock offs. This does not appear to be the first dispute between the companies mentioned, but legal disputes can take a long time to resolve and sentiment has been poor around this name, so news like this only adds to consternation. And the next logical step is the US patent is also useless. I suppose the whole idea of brand name means nothing here, but you can't talk logic in panic.

With the valuation as it is, I am interested in buying more but am going to wait a bit to see where the stock bottoms out. With the heavy volume in the early going, we might get a capitulation type day in the stock which would create a nice entry. When I look at a 1 year chart on this name, I see in early May 2007 a 'gap' in the chart - where it opened 1 day substantially higher than the previous day close. This appears to be in the $28+ range and this is right where the stock is now.

On most stocks, gaps in the chart are generally "filled", meaning a stock will at some point go back to fall and fill in this 'gap' (this is a controversial theory among chartists) - if it is correct or not, really is not the issue - it just happens a "lot". So we might get some support there. I will be adding more as I see where the stock settles - Crocs is not going out of business, but this free fall is not a fun thing - that's for sure.

This is a stock many bears have been betting against for a long time, hence why I don't want to get any further in front of the freight train. But based on analyst estimates, we have a company trading at half its growth rate. Doesn't mean it could not go to a third of its growth rate but at some point logic must follow...

• Crocs Inc. (nasdaq: CROX - news - people ) may be famous for its holed, foam-like shoes, but the European Union's Office for Harmonization in the International Market ruled in December that Crocs' Registered Community Design, the E.U equivalent of a patent, is invalid. According to the ruling, Crocs' Beach model shoes "lack individual character" compared with other similar brands.
• Holey Soles Holdings, located in the Vancouver, Canada, filed the complaint against Crocs in the E.U. claiming the Niwot, Colo.-based company should not be allowed to forbid other shoe manufacturers from producing similar designs. Crocs plans to appeal the ruling, though the dispute is not the first between this pair of shoemakers.
• Holey Soles and Crocs, formerly known as Western Brands, had been selling essentially the same shoes between 2001 and 2005. In early 2005, Western Brands reorganized to become Crocs, and became aggressively ambitious in its growth strategy and in its attempts to push competitors out of the game. Crocs filed a lawsuit in 2005 against Holey Soles in the Federal Court of Canada, and Holey Soles fired back by filing for a declaratory judgment from a New York court stating that Holey Soles' designs do not infringe on Crocs' intellectual property. The issue is currently pending.

Disclosure: Long Crocs in fund and plan to be long Crocs in personal account soon

Comments

[VegasBob]

I recommended shorting this stock in September when it was up to $67. I sweated while it climbed to about $77. But I was RIGHT!!!Here's a simple strategy. Short CROX!!! Don't believe me? Think back to Boston Chicken. It took a few years, but Boston Chicken dropped to pennies. So will CROX. There is nothing that is particularly remarkable about ugly rubber shoes that are full of holes. This is just a fad. When the novelty wears off, CROX will be trading for about a dime...

[borisb]

CROCS has very small sales per share and the high gross margins on those sales are under seige.

[TraderMark]

VegasBob - excellent call there. While I do worry about the "very long term" I certainly expected the 'fad' to last a few more years. We shall see how it plays out.

[pingish]

Shorts have been leaning on this name for quite some time... and getting killed until recently. Author is correct to try and not picking bottoms.

As for me, I think that the shorting is a little overdone and am interested in seeing the short interest for January. My personal belief is the Crocs are not a fad. They've become a staple shoe for people whose job is to spend their entire day on their feet.

Instead of soaking their feet for a half an hour after work, these guys just pop off their Crocs and go out. There's value there.

[clueless,not shoeless]

With sales of sales of $820 million to $830 million..(roughly a nickel above the company's previous guidance of $1.89 to $1.93 a share, it's
hard to believe that this company will be trading for about a dime, but who knows.This collapse is going on it's 3 month, and if it misses again...watch out!