By all accounts, it's a red-hot, must-own name.
Already up more than 1,100% from last March's low, Crocs (CROX 0.30%) managed to tack on more gains last week in response to blowout second-quarter numbers. The company's top line of $640.8 million was not only a record, but it easily surpassed analyst expectations of only $566 million. Per-share earnings of $2.23 similarly trounced estimates of $1.59. No investor has any reasonable right to ask for anything more. This company is clearly firing on all cylinders.
But stock picking can be a tricky endeavor sometimes. While timing your trade entries (and exits) based on a chart usually ends up costing more than it saves, this is one instance where waiting for a rally to be reeled in before you buy is apt to pay off. Consider owning something more broad-based like the Nasdaq Composite (^IXIC +0.36%) or the Nasdaq 100 instead. It boasts a little less upside right now, but also a lot less risk.
Image source: Getty Images.
Too much, too fast
First and foremost, yes, this is the same Crocs behind the colored foam clogs that were all the rage in 2007 then suddenly seemingly fell off the face of the earth in 2008. The shoes' funky-but-functional form never really fell out of favor. It was simply in a holding pattern, waiting for a time when consumers once again valued comfort over convention. Working at home while the COVID-19 pandemic was raging was that opportunity. Last year's sales of $1.4 billion were up 13% year over year, and that's with a supply chain impasse resulting from shutdowns. Last quarter's revenue grew 93% year over year, better illustrating the sort of demand for ultra-comfortable footwear that's in place right now. It's a juicy story stock to be sure.
As veteran investors will attest, though, story stocks that have rallied more than 1,000% in the span of just 16 months still require careful handling. Indeed, this one arguably deserves to be sold by current owners and avoided by prospective buyers.
CROX data by YCharts
It's not a matter of valuation, for the record. This year's projected per-share earnings of $5.72 and next year's consensus earnings estimate of $6.44 per share leave the stock trading around a forward-looking P/E ratio of 20, give or take. That's a perfectly palatable price for an organization that's expected to see a 9% increase in sales next year after huge revenue growth of 47% this year.
The issue, rather, is the way the market works in the real world.
Ever heard the term "buy the rumor, sell the news?" It's the stock market's spin on "as good as it gets." There's no denying Crocs has done well in recent quarters, and the future looks bright even if it doesn't look thrilling. As was noted, however, the stock is now up more than 1,100% from last March's low. That's huge, but more than that, it's the sort of run-up that was likely driven by speculators fearing they were going to miss out and buying, which of course exacerbates an already hot rally. These are the same folks who are just as quick to take profits following a big bullish move, and with nothing new looming on the company's long-term radar, that profit-taking could take shape soon, and in a hurry. This will put just as much bearish pressure on the stock.
Your gut was right
None of this is to suggest Crocs is un-ownable ever again. It's a solid company even if the second (post-pandemic) act is going to be nowhere near as thrilling as the first. Crocs has embraced ideas like customization and work-oriented marketing, which should help it sidestep becoming the fading fad it turned into back in 2008.
It's also not to say overbought stock charts are something most investors should worry about most of the time. Buying and holding quality stocks tends to minimize the benefit of trade-timing, assuming you can time trades to your benefit.
It's simply to point out that there are times when the bulls can get a little -- or a lot -- ahead of themselves. Such mistakes are usually corrected sooner or later, often with a sizable pullback. This looks to be one of those times. If you're not looking take an aggressive risk here, a Nasdaq-based index fund like the Invesco QQQ ETF (QQQ +0.48%) is a better-balanced choice.
