The Sharks are feeding on Crocs

November 6, 2007 12:43 am

What am I missing? Wasn’t it was only a few months ago that Crocs was the golden child and was going to be the next Shoe-Google. Back then, I was the “stupid one” who had no idea what he was talking about, as once again I was told over and over that this time was different. It was only a few months ago that I warned about the over-valuation of the stock and that $40 was going to be a price to watch for if the stock did not meet investor’s expectations. Today, I write this trying to find answers, not rubbing salt in an open wound.

For the past 2 years or so, the Crocs bandwagon had many well-heeled fanatics buying shares as they were hopeful of a retirement based on the a fanciful valuation of their rubber-shoe empire. Along with that, it seems that the anti-bacterial component along with slipper-like comfort, had most looking the other way from the horrific fashion statement which the bold colors represented from the over-sized hole-ridden footwear. Add that most analysts had Crox at a BUY (or better) and several well known writers/bloggers were continually defending the company at all times. It is no wonder that most  investors were in continual BUY mode.

Crocs Analysts

The problem is this: If only a month ago many investors owned shares with the belief that there will be a steady growth of earnings moving forward; why did the stock take such a tremendous hit after posting, albeit disappointing, yet somewhat reasonable solid results? It seems that once again, emotions are the crux of the Crox.

Crocs Fundamentals

Look at the fundamentals and it is exceedingly hard to comprehend how the stock is trading below the level it was when the essentially all of the information is similar to what was published in May 2007. Fundamentally, not much has changed except for the fact that growth is not expanding at the rate it had been for the past several quarters. Now, unless there is more that meets the eye with the latest announcement of earnings and projections, there is much more panic than logic involved in this sell-off – But you already know that. It is a well known fact that EPS growth slows once a company moves towards maturity. Look at Dell, Microsoft or even Merck. It is not simply the EPS growth percentage, it is also the ratios that are of importance here.

The truth is that Crocs has been the favorite of the “emotional trader”, those that are playing the home-game. The reason for the past run up being so strong was based on strong emotional ties to a stock because of love of past growth. These are the same investors who are now running for the hills – simply selling at any price because they are apparently holding low-cost-basis positions that they do not want to lose on. There is no logical reason for this massive sell-off. Really…

Crocs Valuation

But what does logic have to do with this stock anyway? One more question: Where are all of the die-hard writers now? You know, the ones that were screaming to buy-buy-buy! Why are they not here now, helping you with the situation when the decisions are much tougher. Frankly, running away and pretending the stock did not get cut in half will not provide comfort or direction. So, here is a life-ring: Hold on for the bounce. It is coming and will be strong.

Just to be clear: We sold/shorted at the peaks, now we are buyers in the valleys. Use logic here and profit should follow.

Horowitz & Company clients may hold LONG and/or SHORT positions in CROX.

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