Although it's been a bumpy ride, shares of Crocs (CROX 1.53%) have more than doubled in the last three years. That impressive gain exceeded what both the S&P 500 and the Nasdaq Composite Index were able to return.
But in 2023, investors have been hurting, and shares are down 17% as of Sept. 20. This underperformance relative to the major indexes presents a great opportunity. In fact, Crocs might be the best stock to buy for less than $100 right now. Here are three reasons.
1. A resilient brand
Crocs has been around for over two decades now, and despite that relatively long history, it hasn't been smooth sailing. The brand has fallen in and out of favor with consumers, and most notably, the business nearly entered bankruptcy in 2009 during the Great Recession. After monumental success in the early 2000s, Crocs overextended itself, and the company needed to right-size its operations.
Sales have soared since 2010, and in 2017, Andrew Rees became the CEO. Crocs has posted incredible revenue and profit growth in the past few years after he became CEO, which is indicative of how strong the brand has become these days. Piper Sandler's Taking Stock With Teens survey showed that Crocs was the sixth most-popular footwear brand among the Gen-Z demographic.
Wall Street analysts expect sales to rise at a 10% annualized clip between 2022 and 2027, so there is still healthy growth on the table as we look ahead. Crocs will continue to rely on its effective marketing strategy, which includes various collaborations for its famous foam clogs, to keep customers interested and to enhance the brand's visibility.
2. Outstanding profitability
Crocs' monster growth hasn't come at the expense of the bottom line, and investors will appreciate that this is an extremely profitable enterprise. In the past three years, the gross and operating margins have averaged 56.4% and 25.7%, respectively, better than a successful industry rival like Nike.
And Crocs has shown an amazing ability to scale well. In 2017, the business posted an operating margin of just 1.7%. In the second quarter, this metric was 29.7%. You would struggle to find many businesses like this that have rapidly expanded their profitability in just a few short years.
The company generates lots of free cash flow as well, including $280 million during the first half of 2023. Management has decided to use these proceeds to pay down its debt burden, most of which came about because of the $2.5 billion acquisition of casual footwear maker HeyDude. Crocs' long-term debt balance has declined noticeably from $2.6 billion a year ago to just over $2 billion today.
And the leadership team announced the resumption of share repurchases in the current quarter, buying back $50 million worth of stock in the month of July. "We currently have $1 billion remaining on our share repurchase authorization," chief financial officer Anne Mehlman said on the second-quarter earnings call. That equates to almost one-fifth of the current market cap.
Using cash profits to both get the business on better financial footing and shrink the outstanding share count are smart moves by executives.
3. Attractive valuation
Investors might quickly assume that in order to own shares of a business that has posted healthy revenue and earnings growth, that possesses a strong brand, and that is very profitable, the valuation undoubtedly will be expensive. With Crocs, this is far from the truth.
As of this writing, the stock trades at a trailing price-to-earnings (P/E) ratio of just 8.4. That's much cheaper than the trailing-three-year average of 12.9. And Crocs' valuation is less than half that of the S&P 500.
It's hard to pinpoint why shares are selling at these levels. Perhaps investors aren't happy with the slowing top-line growth. Or maybe it's the debt balance that's still sizable. I think investors are simply not yet buying into the Crocs' story, with the belief that the brand will once again fall out of favor.
The data doesn't show that this is the case, making Crocs a rare stock that can satisfy both growth and value investors.
