Was Peter Lynch Wrong? Crocs and Other Trendy Companies

Well, not exactly ... In his famous 1980s investing book, Beating The Street, famed portfolio manager Peter Lynch described following his teenage daughter into the mall and seeing what stores and products her and her friends patronized. He described using these insights to get into the "hot" clothing/apparel/brand-type trends before stodgy Wall Street analysts recognized them.

While this axiom/method has some validity and getting in on "trends" early is often effective, you must remember that today's "trendy" is tomorrow's "out-of-style." The pre-teens and teenagers who drive many of our fashion trends and spending are extremely fickle in their spending patterns. This also applies to other sectors, not just clothing/apparel.

With this in mind, take a look at Crocs (CROX) stock.

CROX MONTHLY WITH KKD AND HOTT

(click to enlarge)

CROX is down from an October 2007 high of 75.21 to Wednesday's current low of 9.70. The bottom two charts show some other examples of previously "hot" brands/products that had huge stock runups, then have since never recovered their peaks, Krispy Kreme Doughnuts (KKD) and Hot Topic (HOTT). There are countless other examples of this, especially in the fashion/consumer product world. The kind of stocks I'm thinking of are the ones that even the casual investor is probably aware, such as a TASER International (TASR).

When you are considering buying the stock of an extremely hot sector or product, you must remember that there is a good likelihood of the trend slowing significantly sometime in the future. This is especially true of a company that relies on a single product or a limited product line. Iomega (IOM) was an example of this in the technology sector. Be ready to take profits on the way up, and bail out or go short on the way down.

I am not specifically a retail sector analyst or an analyst of hot trends - the comments in this article are just my perceptions and thoughts on previous examples of well-known brands and products and stocks that had big runups.

In my opinion, companies that have a super-hot product or line are often smart if they sell out to a larger company near the top of their run. Previous examples of this are products like Snapple and Vitamin Water, which sold out to much larger competitors. I would guess that Under Armour (UA) could possibly in the future be bought out by a Nike (NKE) or Adidas, but this is pure speculation on my part.

Of course, there are "trendy" or "hot" products/services/businesses that continue to grow and expand, despite skepticism. Examples of this are Google (GOOG), Starbucks (SBUX) and Blackberry devices (RIMM), at least up until the present time.

There are also brands that become "timeless" and are strong enough to weather the fickle changes of the fashion world. Ralph Lauren (RL) and Tiffany's (TIF) are examples of brands that should stand the test of time, in my opinion. This is not to say that these stocks and companies may not have poor quarters or even years, or could suffer a downfall due to poor management. Also, companies with diversified brands and product lines should be able to sustain longer-term growth and value. European company LVMH is an example of this (Louis Vuitton, Moet, Hennessy among its brands).

In short, there are profits to be made on the upside to a super-hot consumer product or trend or stock, but be ready to hit the exits or even be short if the trend turns sour.

Disclosure: None.

Comments

[Crocs Watcher]

one more sure fire gurus who want to advise the world what to buy and when. Where were you when this stock was trading above 75. Have you written any articles recently on iPhone, or iPod or even Motorola's razor. Wallstree pandits have no clue other than beating down beaten down stocks and beating up uptrending stocks. You are just one of them.

[thebage]

Of course Lynch would also consider the advantage or the moat. A trend is not enough of a reason to own a company. The problem with Crox is that building a pair of rubber shoes for .50 cents and selling them for $30 is all trend and not a defendable moat. It is too easy and too profitable for someone else to build the same pair or shoes for .50 cents and sell them for $9.99 at Target!

Google, Apple and RIMM are more than trend because the R&D and costs required to get in that space are enormous. Not to mention the talented execs.

[Crocs Watcher]

Here we are writing off a product line before we know for sure whether the problem with the Company is product or the overall decline in the sector and the economy. If any one can tell me how to quantify and attribute the declining sales to declining brand image, I would accept your argument as rationale and sceintific. Right now no one has any clue whether Crocs have lost their appeal or the US economy has lost its punch.

[J Lazerow]

"Of course, there are "trendy" or "hot" products/services/businesses that continue to grow and expand, despite skepticism. Examples of this are Google (GOOG), Starbucks (SBUX) and Blackberry devices (RIMM), at least up until the present time."

what a joke comment. blackberries are tremendous productivity tools while google provides a measurable advertising system. both provide value to the end user/client. these are not "hot" products or companies that will suddenly fade because teenager tastes are fickle.

[BrendaWalshCFM]

The shoes are ugly and about as practical as Jelly shoes from the 80's. They stick out like a sore thumb and most people that have them are almost embarrassed to wear them anymore. Even people over in Europe and Asia are turning their noses up to Crocs. It was time for the tacky fad to end. Sad end to a pathetic one-hit-wonder company.

[Crocs Watcher]

What can I say. The Yahoo board is back here full force to drive down the sentiment about this Company.

[Grumann]

Regarding CROX: Does anyone know when insiders can buy the stock? There is probably a blackout period around the Q1 results. When it opens, it will be a tell if the insiders come back in. They made hundreds of millions last year selling. If they come back in, then I'm in. Overseas growth cannot be ignored. PS my family (especially the 80 year olds and the healthcare workers) swear by the comfort of these shoes.

[Ken Singh]

Add "RIMM" scam to the findings:

DEPARTMENT OF TELCOM ENFORCES CYBER LAW ON MOBILE OPERATORS TO SHUT BB SERVICE
INDIAN PARLIAMENT SESSION..........QUESTIONS RAISED ON NATION SECURITY THREAT FROM BLACKBERRY SERVICE......

CIRCULAR NOTICE HANDED TO MOBILE OPERATORS TO OBEY THE CYBER LAW AND SHUT DOWN ANY BES/BIS SERVICE FROM REASEARCH IN MOTION ASAP

AIRTEL COMMENTS ....LAUGHABLE....AIRTEL HAS MORE TO LOOSE THAN OTHER CARRIERS

CHINA STILL NO BLACKBERRY SALE.......WHAT DID CHINA DEMAND FROM THESE CROOKS?

ENTERPRISE NOW WAKING UP TO THIS SCAM PUSH EMAIL...WHICH IS CREATING PANIC AMONG ENTERPRISE PUSH EMAIL USERS AS THEY FIND THEIR EMAILS CAN BE STORED AND READ BY ALL NATIONS

((((ONE PONZI WONDER BUSINESS MODEL WILL BUST NEXT))))

The Indian BlackBerry Ban Back On… At Least Temporarily
The Home Ministry of India has asked telecom operators to halt certain BlackBerry services until an approved monitoring system that will allow the government to intercept and decrypt messages sent between BlackBerry devices and the secure network they run on is put into place.

The department of telecommunications (DoT) and Research in Motion have been going back and forth with proposed solutions to India’s security concerns for the past several weeks without coming to a general consensus and thus, the government has issued temporary ban on all PIN messaging, BIS email, and BES email.

Sources say that RIM has asked that the be given until the end of the month to address the security concerns. BlackBerry service is still working right now, however, the heat is on for RIM. India represents way too big an opportunity for RIM not to come up with an acceptable solution.

[BrendaWalshCFM]

What can I say? Crocs Watcher is here in full force 24/7 to pump CROX. Lurking all day long on Crocs related message boards as the self-designated cheerleader/shill. Some life that must be.

[AJ, Washington DC]

Not sure what to make of this company. They don't seem to have any other product. Granted, the material they use is a patented closed cell plastic, but for the customer, there is no appreciable difference between a Crocs product and a clone/rip-off etc made from a brightly colored generic plastic - other than the price, of course. The stories about getting caught in escalators etc scared a lot of people, especially coming in on the heels (pun intended) of last years toy recalls. Still, we've just come out of a long winter... who buys these shoes in winter? they are a summer product. maybe they will have better sales in the next quarter as the weather grows warmer. I would not look to overseas and tropical markets for salvation, the product is too easy to copy (probably by the very firm that makes them for CROCS, using the same molds but different plastics.

[Crocs Watcher]

BrendaWalsch You should know that the world does not necessarily think what you think. Your statements fall on the verge of childish and snobbish. Just because you think the shoes are ugly does not make it a universal fact. Secondly you have no distinction between rubber, plastic and a patented material that other cannot copy. Thirdly your statements are fully onesided. Read my statements. All that I am asking is to have some objectivity and quantification in these unvalidated generalizations, feelings, assumptions and beliefs. A meal in a five star hotel does not necessarily the best in the world. You should know that wearning a leather made footwear made out of a slaughtered animal is probably more uncivilzed and uglier than wearing a plastic shoe however ugly it might be. So in many Buddhist countries people need not necessarily think what you are thinking.

[Crocs Watcher]

And yes I am a Crox cheerleader though I am not sneaky enough to prowl around the boards. I have a life beyond this. But what are doing here other than bashing this stock on every available platform in the world?

[Ken Singh]

INDIA CYBER LAW: Any communication service must be hosted Domestic only (inside India only) , if not shut out is the action by the Cyber law in INDIA

What is "RIMM" service and Business Model?

In Violation of Indian Cyber law...The Mobile operators warned to shut the service and provide solution to Department of Telecom now.

What will China and other Nations demand next?

Which enterpise will like to use Push email from RIMM once they know that "RIMM" Management has secretly given access to all email records and stored for them for 6 months? Do any Enterprise in any country want other Nations to have access to read their emails?

USE YOUR BRAIN, IF YOU HAVE ONE TO DECIDE

((RIMM Buisness Model is Bust))

AMEN

[BrendaWalshCFM]

Dear Crocs Watcher:

How many posts have you made in just the past few hours? If you have a life beyond this board then your rapid fire posting here doesn't lend much credibility.

BTW - my shoes aren't made of leather - they're imported crocodile. So in a way you could say that I do like to wear Crocs on my feet - genuine ones!

[Crocs Watcher]

I have posted just as many as you have. And as rapidly as you have. So you should not call me names. It is you who made this otherwise meaningful discussion into a personal one. When I mentioned about Yahoo board, it was not directed aginst you. But you took upon yourself the responsibility to own that statement. So please stop wasting my time by addressing me again personally.

[Onecent]

For starters, Crocs was never a teen trend, in fact it was the one demographic that no effort was made to capture.

Even though the management is rotten, the product was a winner as a new genre of comfort shoe. I think they have an enduring niche with small kids, hospital/food service workers, boaters, and people who like low maintenance comfort shoes. Owning various types of shoes is what most of us do, it's not a zero sum situation.

There are no apparel makers not facing headwinds in this recession. Management is the main issue with CROX right now.

[Ceviche Fund Partners LP/Dan Jacome]

It was a monster stock and it's run is over -- stick a fork in it.

You can see more of our thoughts here:

seekingalpha.com/article/72369-no-hope-l...

[DrBobNM]

One can apply Peter Lynch's principles to CROX, but in reverse. When CROX was at 75/sh, and the street said they could do no wrong, our local retailers here could not move these ugly bricks off the shelves. This persists even to this day, obviously, but the writing was on the wall so one could short at their leisure and make a killing.

[Freddie Mertz]

Peter Lynch made those comments 20+ years ago, before there were 3 million hedge funds trying to get ahead of every stock move. It really doesn't apply anymore and is a very dangerous way to invest.

[MEXX]

I see CROX nose dive more of a correction exacerbated by an economic downturn, and a couple of management misteps (yes, call it a perfect storm) than a trendy stock gone out of style. The stock run up had more to do with media hype and hedgies bidding up the stock, at some point they realized it got way ahead of itself and the shorts came in. As someone else said, the international growth CROX is having cannot be ignored. Everyone in Israel, Spain and every other beach town around the globe wears these things. Been to a hospital lately? An for those of you that say this is a single product company, you might want to visit CROCS.com

I have never owned the stock, but I think it is too early to write off this company. At this price level, it may be time to be greedy, take a long position and be a little patient. This storm too shall pass.

[Jim Estner]

"In my opinion, companies that have a super-hot product or line are often smart if they sell out to a larger company near the top of their run. Previous examples of this are products like Snapple and Vitamin Water, which sold out to much larger competitors. I would guess that Under Armour (UA) could possibly in the future be bought out by a Nike (NKE) or Adidas, but this is pure speculation on my part."

This is perhaps the lamest tripe I have ever read on Seeking Alpha. Unbelievable.

Think this through - you are saying absolutely nothing of any value.

First, you ramble about how a Company is best to sell out on top of its game...you think? Do you have some crystal ball that says when a Company has hit that peak?

And then you peddle absolute drivel about Nike or Adidas possibly being interested in Under Armour one day...really? Thanks for the insight.

[Jim Estner]

"In short, there are profits to be made on the upside to a super-hot consumer product or trend or stock, but be ready to hit the exits or even be short if the trend turns sour."

I think I need to frame this gem. You are truly a sage.

[Moby Waller]

Jim Estner:
Your points are well-taken, you are obviously sophisticated and intelligent. This piece was meant more as an anecdotal, breezy, educational type article, and to create some conversation. Some of the points made are not as obvious to newer, less-sophisticated investors.

Many many people fall prey to the hot stocks of the day and buy in right at the top, such as CROX at 70 last fall. We saw it happen on a massive scale when the Internet Bubble cracked in 2001. I, for one, did not lose everything that day, unlike many investors/traders. I was taking profits all the way up, and saw it for what it was, and foresaw the inevitable decline. Obviously I was not the only one, but many people got crushed.

As to the point about smart companies knowing when to sell out, the unwritten implication of my comment on Snapple and Vitamin Water was that the companies who bought them were kinda stupid, as in paid way too much in my perception. And while it may be obvious to you that UA could be a takeover target, it may not be to everyone.

Anyhoo, I'm writing a variety of articles, some of which will be very specific, some very technical, some breezy, some anecdotal, some very in-depth on complex options strategies, and some very opinionated (I just submitted a bullish WMT article today with specific targets). Hopefully you will like others better.

[Jim Estner]

Buying at the top is foolhardy, but the top sometimes turns into the middle. Other times it really was the top. So my point is that people need to learn ways to figure out, or feel out, tops - rather than being told to sell out at tops (which everyone is trying to do naturally).

As for UA (UARM), my point is more that you say it could happen. This is just like saying it might not happen. As such, it adds nothing to the article. I think expounding on the synergies, or why it makes sense to you that they would merge, could be much more helpful.

[User 172133]

Peter lynch may have had a good point, if you got in to a smaller company early. But, to invest in a overvalued large company, like RIM, and ignore fundamental valuation is a mistake. RIM has sales of $6bn and a valuation of over %65 billion, a bubble like those of 2000.

[shoeboy]

Crocs core shoes will be promoted on sale for up to 50% off starting this weekend. Check out the Sunday Papers for the Sale Ads. Retailers are stuck with tons of inventory. Once the price of core product is broke you know what happens next!

[Rafael Grillo]

I've written a couple of articles in my site about this same topic. It is possible to identify great companies and great products that meet fundamental consumer values and should generate significant returns over the long term by observing their action in the marketplace. By the same token, and paying close attention, it is possible as well to discern which are just fads or niche products. Nothing wrong with riding Crocs all the way to $75. But that was it. There is nothing left in that stock. The most serious financial mistakes are made when people consider these declines as buyable dips. Crocs is not a $75 disguised as a $12 one.