What happened
Shares of Crocs (CROX -2.40%) skyrocketed 47.2% in July, according to data provided by S&P Global Market Intelligence. This left the 9.1% return of the S&P 500 far behind. Oddly enough, there was little good news for the company during the month on a fundamental basis. But maybe investors were finally calming their nerves regarding the economy and realizing how cheap Crocs stock had become.
So what
In late June, Crocs stock hit a new 52-week low of $47.21 per share. And it was still trading around this price once July started.
On July 5, Loop Capital analyst Laura Champine became more optimistic about Crocs and upgraded the outlook for the company from hold to buy, giving it a price target of $75 per share, according to The Fly. For perspective, it traded around $48 per share at the time, suggesting a whopping 56% upside.
This analyst upgrade did boost Crocs stock. But shares kept rising thereafter even though several other analysts either downgraded or lowered price targets in subsequent days.
Perhaps shares of Crocs kept rising because the company won a lawsuit. On July 13, Crocs announced it had been awarded a little over $6 million total from two shoe companies that had infringed on its patented clog design. While it's good to see that its brand is defensible in court, I don't think this was a driver for the stock. Consider that there are still lawsuits outstanding against 19 other companies. And $6 million is relatively little money for a company that expects to do $3.5 billion in revenue this year.
The more likely driver of Crocs for most of July was its deep value-stock status. At its lowest point, in late June, Crocs stock traded at just 4.2 times its trailing net earnings -- incredibly cheap. Even in a tough economy, consumers will likely keep buying shoes. And it appears the market decided Crocs stock was finally too cheap to pass up, boosting its outperformance in July.
CROX PE Ratio data by YCharts
Now what
Crocs is scheduled to report financial results for the second quarter of 2022 the morning of Aug. 4. Management has guided for revenue of $918 million to $957 million, which would be year-over-year growth of 43% to 49%. However, beyond hitting these expectations, here are two things I believe investors should watch.
First, investors should watch Crocs's organic growth rates. The company recently acquired shoe-making rival Heydude, boosting its expected revenue growth. However, this acquisition could mask slowing organic growth numbers. Management expects the Crocs brand to grow 17% to 20% year over year. And if its growth falls short of this, that might be a sign that consumer demand is indeed slowing -- a potential problem.
Second, investors should watch Crocs' cost of goods sold. Inflation doesn't just hurt consumers, it hurts companies, too. If Crocs' expenses rise too fast, it might not be able to pass cost increases on to consumers fast enough, dampening profits.
If Crocs can avoid these two risks, then it will still be a no-brainer buy right now for long-term investors, in my opinion.
