Crocs: Buy Panic

Shares of Crocs (CROX) tumbled 36% today after the company's forecast failed to impress jittery Wall Street investors. This was certainly not a move I was expecting having pitched the stock for the AllStar Portfolio just three weeks ago. Yet, at the same time, the magnitude of the move is by no means surprising. Crocs has always been, and will be for the next few years, a momentum stock. A slight disappointment to the market can easily lead to the reaction we saw today.

First, it is worth mentioning that the stock is now trading at lows not seen since... August. The rally in shares ahead of the results makes the sell-off appear more severe than it would be for the long-run investor. The stock has also still more than doubled this year. However, whether the sell-off is severe or not is irrevelant.

I would encourage long-term growth investors to not waste time worrying about near-term momentum-related market reactions and overreactions. Instead, as always, focus on the fundamental drivers relevant to your thesis. Sell-offs like this may offer the best entry points into excellent growth names or opportunities to double-down. As I mentioned in my newsletter rebuttal following my pitch of Blue Nile (up 110% since): a sharp momentum-related sell-off may be the best thing that could happen to your stock.

So the quesition on to ask on Crocs is whether the sell-off was related to deteriorating fundamentals or momentum. In spite of cautious tone set by the retailers for the holiday season, Crocs is still expecting 35%-40% revenue growth for 2008 ($1.11 billion to $1.16 billion) in-line with my prior expectations. Remember, we are still in November 2007 and most management teams selling to the consumer would be prudent to stay conservative for now. Even under the current guidance, the company is now trading at roughly 18x-19x forward earnings. Yes, there are concerning trends given the rise in inventories and the conservative tone for the rest of 2007; but overall, things don't seem to be bad at all, certainly not enough to erode $2 billion in market capitalization. Demand, the most important metric, still remains strong, though seasonality and infrastructure build has somewhat clouded forward visibility. But what do I know; let's see what the experts on the fundamentals have to say.

While market participants were selling all day today, the analysts did not seem fazed by the numbers. Robert W. Baird analyst Mitch Kummetz reitereated his "outperform" rating on the stock and raised his price target from $80 to $87. Analysts at J.P. Morgan, Thomas Weisel, Piper Jaffray, and Wedbush Morgan, each found that the sell-off provides an attractive entry point for the shares.

And, as I am writing, the Crocs Board just authorized the repurchase of $1 million shares. So now we know what they think of the sell-off as well. Regardless, I believe that those that had the stomach to buy into the panic today made the right move. That is not to say that Crocs has bottomed, but focusing on the fundmentals is almost always a win with volatile momentum stocks. Check a 2-year chart of Hansen Natural (up 60% since my newsletter pitch). This stock got crushed nearly 50% when the momentum guys exited the stock a year ago. It has more than recovered those losses since, even as skeptics decried energy drinks are a fad ready to implode. 18 months from now, I believe Crocs's chart will be almost identical.

Skeptics may have won today's round, but time will tell who wins the game. Stay tuned.

Neal Sangani

Disclosure: I own calls on Crocs. My comments are for educational purposes only and are solely my opinions.