One popular strategy to achieve solid returns in the stock market is to focus solely on companies that exhibit tremendous sales and/or profit growth. The hope is that the underlying financial gains of the company will be long-lasting, which will translate into a substantial rise in the share price. Usually, this style of investing leads to owning mainly tech stocks -- enterprises that most people probably don't understand well enough.
But there are much simpler businesses like Crocs (CROX 2.56%) that can make for outstanding investment opportunities. Here's why it's my favorite growth stock right now.
Crocs is a consumer favorite
In 2021, Crocs posted sales of $2.3 billion, up 67% year over year. And this was on top of double-digit gains in the previous two years. The strong momentum hasn't faded just yet as sales jumped just over 50% in the latest quarter (ended June 30). While Crocs has gone in and out of favor with consumers throughout its history, the business has been booming in the past few years.
Credit goes to the company's powerful brand. According to Piper Sandler's fall 2022 Taking Stock With Teens survey, Crocs was the fifth most preferred footwear brand among the Gen-Z demographic, up from the sixth spot earlier this year. And HeyDude, another casual footwear maker Crocs acquired for $2.5 billion earlier this year, was number seven on that list. This clearly bodes well for how well the brand resonates with consumers, particularly younger ones.
And this is evident when looking at the company's gross margin, which measures the amount of money a business keeps on a per-unit basis from selling a product after costs for things like supplies, transportation, and manufacturing are taken into account. In the most recent quarter, Crocs' gross margin of 51.6% was higher than at footwear juggernauts like Nike and Under Armour. This also demonstrates the pricing power that Crocs has.
Crocs is pushing for more growth
Acquiring HeyDude should help Crocs diversify its product offering and drive even more growth over the long term. Most of Crocs' footwear sales are still represented by one item, the popular foam clog. This has certainly brought the business great success, but making moves to introduce new products under the Crocs umbrella could also bear fruit. HeyDude is forecast to bring in $870 million (at the midpoint) in sales in 2022, about one-third of the revenue the Crocs brand expects to bring in.
The acquisition is already working out extremely well. Management expects the HeyDude brand to reach $1 billion in annual sales by 2026. And by then, the leadership team expects total company sales to come in at over $7 billion, as both the Crocs and HeyDude brands register impressive gains over the next few years. Key actions like boosting digital sales, expanding in Asia, and executing innovative marketing campaigns should support this goal.
Crocs' valuation is attractive
Despite its outstanding growth in recent years, Crocs is currently priced like a value stock. Shares are down 42% this year, trading now at a price-to-earnings ratio of 8.5. This is substantially lower than the trailing three-year average multiple of 15.
The valuation that the market currently places on Crocs right seems like a huge disconnect. Crocs is an extremely profitable enterprise, posting an operating margin of 25.7% in Q2 2022, which has expanded significantly over the years. What's more, the business generates lots of free cash flow, to the tune of $511 million in 2021. These favorable economics are largely because capital expenditures are so low in any single year, usually 3% of revenue.
Crocs is certainly an investment that fits squarely in the category of growth stocks. However, its low valuation provides investors with even more upside. There's no reason for Crocs to remain this cheap over the long term. As a result, this booming footwear brand deserves a place in your portfolio.
