Has Crocs Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Crocs (Nasdaq: CROX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

35.3%

Pass

 

1-Year Revenue Growth > 12%

29.5%

Pass

Margins

Gross Margin > 35%

54.1%

Pass

 

Net Margin > 15%

11.6%

Fail

Balance Sheet

Debt to Equity < 50%

0.7%

Pass

 

Current Ratio > 1.3

2.99

Pass

Opportunities

Return on Equity > 15%

26.9%

Pass

Valuation

Normalized P/E < 20

18.48

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Crocs last year, the company has seen its score rise by two points. Stronger sales growth this year along with a big drop in the company's earnings multiple gave it the extra points, but the company now sees a more questionable future.

Crocs is well known for its rise and epic collapse several years ago on the back of its namesake rubber shoes. Back in 2006, the company earned 62% of its revenue solely (no pun intended) from its classic models. Since then, though, Crocs has branched out in search of products that are less subject to the vagaries of fashion fads, and investors have responded by bidding the stock up strongly.

But Crocs hardly has the footwear industry to itself. With Nike (NYSE: NKE  ) , Deckers Outdoor (Nasdaq: DECK  ) , and more recently Under Armour (NYSE: UA  ) all pushing for position in shoes, Crocs has to overcome the fleeting preferences of its customers. Failure to do so can spook investors, as happened earlier this month when the company had an earnings report that reined in guidance for the just-ended quarter.

But despite falling short of analyst expectations on sales and income in the third quarter, Crocs still shows a lot of promise. It has better margins and returns on equity than shoemaking peers Skechers (NYSE: SKX  ) and Wolverine World Wide (NYSE: WWW  ) , and with a new line of shoes targeting golfers and another focusing on back-to-school shoppers, Crocs clearly sees the need to diversify beyond its existing customer base.

To reach perfection, Crocs needs to keep expanding margins and start passing on some of its cash flow to shareholders through dividends. As long as customers keep buying its shoes, Crocs will have the potential to become a perfect stock.

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 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.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour and Nike, as well as creating a diagonal call position in Nike. 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 (0) | 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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1578997, ~/Articles/ArticleHandler.aspx, 11/26/2014 6:14:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement