Ouch- CROX Just Taught Me A Lesson
Crocs (CROX) is the epitome of triumph and tragedy in the stock market. AFter IPOing around $6.85 a share in February 2006, the stock began a meteoric rise in the fall of 2006, thanks to the rising popularity of its shoes. Its most famous shoes are a pair of rubber sandals with holes in them that are supposedly extremely comfortable. The shoes have since gained worldwide popularity.
Investors speculated the the fad would continue, and the stock continued to rise up to $75 a share in October 2007. Since then, its bubble has broken and CROX is now valued at less than 10% of what it was less than a year ago. On Friday, the stock closed just under $5.
I have been watching the CROX story off and on and it seemed like the epitome of what happens with asset bubbles. A perfectly decent asset, in this case a shoe company, becomes grossly overvalued, as owning the asset itself becomes a fad. The asset becomes so bloated with hot money that there’s no rational reason for its valuation. I thought about shorting the stock, but I never found the balls to do so.
What generally happens is that the asset quickly implodes, so much so that the asset goes below its fair market value. A good example is the tech bubble. While it was wise to sell tech in early 2000 at its insane valuations, it also made since to buy tech in early 2003 when tech stocks were sold too harshly.
I believed this was the case with CROX. After nosediving all the way down to about $6.70 a share, it had rebounded to about $9-$10 a share. It was trading at just a forward PE of 5 based on analyst estimates. I believed it was time to pile in, so I bought a lot of shares in the $9-$10 range.
The next day the management announces that it will be greatly missing its guidance and issued forward looking guidance. Instead of earnings of $1.56 for the year, Crocs expects to break even (in part due to a one time charge of $.13 a share for the closing of a plant). Revenues were guided down for the quarter from the $240-$250 million range to the $210-$220 million range.
Call me crazy, but I’m not willing to sell yet. While the revenue miss is disappointing, the sales are still there and the company is still cheap on a P/S ratio. I’m hoping Crocs will manage to boost its operating margins once it slims down its operations. I also think the company can maintain this amount of respectable sales since while its rubber shoe may be going out of style, the company now has many different types of footwear, and I think the company’s overall brand now is fairly strong.
One thing I’ll always remember from this incident is to take analyst estimates with a grain of salt. Buying mainly on an analyst forward PE is definitely not a mistake I’ll make again.
Disclaimer: Author still owns shares of Crocs (CROX).