Is Crocs the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Crocs (Nasdaq: CROX  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Crocs.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 71.9% pass
  1-Year Revenue Growth > 12% 11.9% fail
Margins Gross Margin > 35% 52.5% pass
  Net Margin > 15% 6.9% fail
Balance Sheet Debt to Equity < 50% 0.9% pass
  Current Ratio > 1.3 2.57 pass
Opportunities Return on Equity > 15% 16.5% pass
Valuation Normalized P/E < 20 36.31 fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 5, Crocs makes an average showing. But there's nothing average about the roller-coaster ride that Crocs shareholders have gone through in recent years.

Until late 2007, Crocs was the darling of the stock market. Strong growth supported a soaring stock price, thwarting short-sellers and enriching shareholders. The fact that the company relied largely on its signature big-holed rubber shoes was a mere afterthought.

Fast forward just one year, and Crocs had lost 98% of its share value. Most people chalked up Crocs as another in a long line of similar fad stocks, like Heelys (Nasdaq: HLYS  ) and its built-in skate shoe.

But Crocs is back. Branching out to boots, sandals, and other footwear products, Crocs is looking less like a fad stock and more like a mature company. Growth hasn't kept its earlier torrid pace, but the stock has put in a 14-bagger since its November 2008 lows.

Unfortunately for the company, though, Crocs isn't on top of its industry anymore. Both Skechers (NYSE: SKX  ) and Deckers Outdoor (Nasdaq: DECK  ) have offered more solid recent growth at cheaper valuations. Still, for Crocs to have risen from its deathbed is a feat in itself.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Crocs to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2010, at 11:22 AM, exdividendday wrote:

    Crocs is a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear for men, women, and children. The Crocs footwear products are divided into four categories: Core, Active, Casual and Style. CROX generated sales of USD 645 million in fiscal 2009 and produced a loss of 42 USD million. Within the past eight years, CROX had five years with losses in net income. Cash flow was positive and amounted USD 61 million. The company has a strong growth track record. In my opinion, CROX is no perfect stock. I would prefer leading sports sponsoring stocks (NKE, UA) or outdoor apparel/shoes stocks (DECK). I made a sector overview of some interesting sports stocks. Here are my results:

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Related Tickers

10/27/2016 4:00 PM
CROX $7.68 Up +0.01 +0.13%
Crocs CAPS Rating: **
DECK $50.76 Down -0.89 -1.72%
Deckers Outdoor CAPS Rating: ****
HLYS.DL $0.00 Down +0.00 +0.00%
Heelys, Inc. CAPS Rating: **
SKX $20.33 Up +0.25 +1.25%
Skechers CAPS Rating: *****