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The decline and fall of Crocs

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crocs stock, croxDoes anyone here remember Crocs, Inc. (NASDAQ: CROX)?

It seems like only yesterday that you'd walk down the street and everywhere you looked, you saw those horribly ugly $30 sandals that were going to change the world.

Well, as it turned out, Crocs didn't change the world. They were just a fad. Crocs are nothing more than this decade's version of the hula hoop, the pet rock, Members Only jackets or the dearly beloved eight-track tape.

The Washington Post recently looked at the decline and fall of Crocs.

The colorful foam clogs appeared in 2002, just as the country was recovering from a recession. Brash and bright, they were a cheap investment (about $30) that felt good and promised to last forever. Former president George W. Bush wore them. Aerosmith lead singer Steven Tyler wore them. Your grandma wore them. They roared along with the economy, mocked by the fashion world but selling 100 million pairs in seven years.

In the space of about 16 months, shares of CROX jumped 600%! The stock did even better than Goldman Sachs (NYSE: GS) -- and no one had to bail them out. Now class, that brings me to today's investing lesson: How to know when you've made the dumbest investing mistake in the world.

I've been in investing game for over 30 years, and I was a big fan of Crocs. I'm not afraid to admit it. We ran the numbers and the growth was solid -- and for a good stretch, we were making lots of money.

I first recommended shares of CROX to subscribers of my Emerging Growth service in April 2007 at around $24 (that's adjusted for the stock's later 2-for-1 split). As soon as I recommended it, the stock started to zoom. It seemed to climb higher nearly every day. Then it jumped 20% in one day in May after another blowout earnings report. By June, we had a double on our hands. My subscribers thought I was a genius. People were planning to name their yachts after the shoes.

But there were problems underneath Crocs' business. The company didn't know how to handle its growth. They mistook a fad for stable growth. To meet demand, they expanded and expanded... and expanded.

The company used money from its public stock offering to diversify and acquire new businesses, such as Jibbitz, which makes charms designed to fit Crocs' ventilating holes and Fury Hockey, which used Croslite to make sports gear. It built manufacturing plants in Mexico and China, operated distribution centers in the Netherlands and Japan and forged into the global marketplace. More than half of Crocs were sold outside the U.S.

On Halloween 2007, Crocs broke $75 a share. We had a triple in just seven months. The next day, the company reported another strong earnings report, but there was one key detail that freaked out the market: Crocs' inventory rose by nearly 300%. Demand simply couldn't match that. The next day, the shares plunged by more than 36%. Investors were devastated.

In Emerging Growth, I decided to hold on. Investing is a tricky business, and you can't let the crowd override your investing strategy. This time, we should have listened to the crowd. The stock continued to sink, and I finally pulled the plug in May 2008 when the shares reached $11. Ouch! Our 200% gain had become a 50% loss.

Now back to today's lesson. When a stock goes up, it doesn't mean you've suddenly gotten smart. Also, when a stock goes down, it doesn't mean that you've become stupid. Stocks go up and down and oftentimes, it's for silly reasons.

Of course, I wish I had done things differently with Crocs, but if you're serious about investing, you will always have a situation like this (read that last part a few more times). What separates a good investor from a lousy investor is how you handle the situations where you have your head handed to you.

My team and I look at the facts and that guides our actions. We don't follow the crowd and we don't follow emotions. The bad investor holds on forever to his or her losers just hoping for a turnaround that will never come. That's a big mistake. Sometimes the smartest move you can ever make is to admit your mistakes and move on.

The company had expanded to meet demand, but financially pressed customers cut back. Last year the company lost $185.1 million, slashed roughly 2,000 jobs and scrambled to find money to pay down millions in debt. Now it's stuck with a surplus of shoes, and its auditors have wondered if it can stay afloat. It has until the end of September to pay off its debt.

"The company's toast," said Damon Vickers, who manages an investment fund at Nine Points Capital Partners in Seattle. "They're zombie-ish. They're dead and they don't know it."

Last November, shares of Crocs hit rock bottom at 79 cents per share! Holy capital loss, Batman! Crocs lost roughly 99% of its value in one year.

We made a mistake and we managed it a lot better than what could have happened. Despite the haircut we took in Crocs, our Emerging Growth Buy List has been an outstanding long-term performer. According to the Hulbert Financial Digest, we're the #1 performing investment advisory since they started following us in 1985.

Remember, it's not just the winners that set you apart, it's also how you handle your mistakes.

Hey, maybe in another 10 years Crocs will become cool again in a retro ironic way.

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Last updated: November 26, 2009: 11:06 AM

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