The fall of Crocs (NASDAQ: CROX) as a momentum stock has been just as spectacular as its rise.After a drop of around 40% in trading this morning, shares of Crocs have fallen below their IPO price -- after closing at a split-adjusted price of $12.58 on the first day of trading, Crocs shares are down to $10.60, giving investors who bought on the first day a total return of about about -16%. That's amazing because at the company's high of $75.21 reached on Halloween of 2007, investors were up more than 500%.
I've always thought Crocs was a garbage stock. In February of last year, I wrote about Crocs as one of three retail fad stocks to beware of. Based on my prior posts on Crocs, here are the lessons I think investors can learn from watching the decline of Crocs' share price:
On a final note, Crocs' beaten down share price might finally make it worth another look, now that expectations have been moderated.
- Beware of one-product retail fads. In order for Crocs to justify its inflated multiple, it needed to succeed in other products. The bulls thought it would, with Georges Yared writing that Crocs was the next Nike (NYSE: NKE). I disagreed with the notion that Crocs was a strong brand -- clog-like sandal shoes might be big sellers but I didn't think they would ever be cool in a way that would allow the Crocs brand to sell other products. So far, Crocs has not been successful in its efforts at diversification.
- Beware of massive insider dumping. Of course you should expect insiders to sell some of their holdings to cash in on their newfound wealth -- you can believe in the long-term future of your company and want a house made of solid gold too. But Crocs insiders took that to a whole other level.
- Analysts were extremely jubilant about Crocs' growth prospects, forecasting high double-digit growth for years to come. But there was one problem: they had absolutely no idea what they were talking about. Crocs was basically a one-product company in the incredibly fickle fashion market, and growth projections should have been taken with a sandal full of salt. The growth projections struck me as being speculative and irresponsible at the time and, in a press release issued last night, Crocs projected an increase in domestic sales of 13% -- not bad, but not the stuff of the next Nike.
- Finally, Costco happily announced that it had a big selection of Crocs available at discount prices and Crocs responded by saying that Costco (NASDAQ: COST) wasn't an authorized distributor and they would find out who was dumping stuff there etc. etc. etc. But that explanation didn't really hold water and, I believe, is indicative of potential inventory problems at the company.
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Reader Comments (Page 1 of 1)
4-15-2008 @ 1:50PM
Jeff said...
Ah the good old times
http://www.bloggingstocks.com/2007/05/26/crocs-is-the-next-nike/
4-15-2008 @ 2:03PM
david.hagins said...
"Beware of one-product retail fads. In order for Crocs to justify its inflated multiple, it needed to succeed in other products."
Inflated multiple?? It was 1/2 of the industry average as of yesterday....
4-15-2008 @ 3:27PM
Dave said...
Crocs are the lamest sandals on the planet. Being from Hawaii and residing in San Diego, I don't claim to have a monopoly on cool, but I could tell that this was one fad that just had to die. Comfort only takes you so far when you look (and feel) like a clown. I am so glad this stock is tanking, the only downside I can see is that they will probably no longer be able to sponsor the AVP tour (actually, that may be a good thing for volleyball's image).
4-15-2008 @ 8:44PM
Zo said...
I think you're right on with your key points and they're certainly good bits to keep in mind -- applicable to portfolios, in general.
But hindsight is glorious. Despite the off-a-cliff fall over past 6 months, CROX was up 190% from your Feb '07 post to its peak almost 9 months later. It was even up about 90% from Yared's May '07 post. Clearly, they were doing something right for at least a year and there was money to be made by even the medium-termers.
I agree that longer-term, as you've implied, one-trick ponies almost always let you down eventually. But just as a broken clock is right at least twice a day, prescience in a cyclical, fad-driven sector is bound to be found...eventually.