It's been quite a year for Volcom (NASDAQ:VLCM) shareholders, complete with a precipitous fall in share price -- and a recovery that I'm quite sure made some investors who took advantage of the opportunity very happy indeed. Volcom has had its work cut out for it given some unwelcome challenges, but it seems to be sailing through with flying colors, which might make rivals like Quiksilver (NYSE:ZQK), Billabong, Burton, and even Nike (NYSE:NKE), which dabbles in skate apparel, green with envy.

Let's flash back and recap the events influencing Motley Fool Hidden Gems recommendation Volcom over the last year. In the fourth quarter of 2005, Volcom's revenues increased 35.8% to $41.2 million, and net income increased 14% to $7.2 million, or $0.29 per share. Although that may sound like a slim increase, the company's tax rate changed due to its initial public offering, so it's not really an apples-to-apples comparison. Operating income increased 45.7%.

Speeding ahead to the first quarter of 2006, Volcom's sales jumped 31.3% and operating income increased 10.6% to $6.7 million. Again, the tax changes made net income comparisons a bit confusing, with net income falling 29.3% to $4.4 million or $0.18 per share. However, maybe the thing that Volcom investors took home was the fact that it ratcheted up its earnings guidance to $1.12-$1.14 per share for the year.

The summer of 2006 brings us to Volcom's second quarter, where things got a little dicey -- in fact, the shares wiped out. Volcom's quarter wasn't exactly at the heart of the matter; in fact, it was really very impressive. Rather, the problem was that a major Volcom customer, Pacific Sunwear (NASDAQ:PSUN), was having a very difficult time of it, which of course represented risk for Volcom. Investors really freaked out, though; the stock dropped to a new 52-week low and a P/E of just 18.

The most recent (third) quarter from Volcom brings us to the present, and those who took advantage of the stock's wipeout in July certainly had some reason to feel good given its rapid recovery. Sure, Volcom's sales increased 19.3% and operating income increased a smidge, but net income and margins dipped. However, it's easy to see that this was a better outcome than expected given Pacific Sunwear's struggles. And, of course, the really good news: Volcom increased its guidance for the full year to $1.16-$1.17 per share, with a 27% increase in sales anticipated. Other good news included the addition of Federated's (NYSE:FD) Macy's to the list of customers that distribute Volcom's lines.

True, it's been a pretty exciting year for the company, which specializes in Volcom-branded board-sports-oriented apparel (as well as grassroots-style marketing that is an intrinsic part of its brand and growth story -- I talked about it a little here). Of course, there's a very good argument that if Volcom could make lemonade from the lemons it was dealt when Pacific Sunwear started having problems, its management is pretty well-positioned for the long term. And of course, the Pacific Sunwear situation had very little to do with the strength of Volcom's brand itself. Meanwhile, when you consider double-digit sales growth, outstanding margins, solid cash flow, and its invested management team, it certainly does seem like the formula for a good long-term investment.

And of course, how the future might pan out for Volcom is exactly what investors hope to get a handle on. Let's see what the CAPS community has to say about Volcom.


CAPS Rating **** (out of five stars)





Bull Ratio


Bear Ratio


Data current as of Dec. 7, 2006.

Obviously, the community thinks highly of Volcom, judging by its bullish four-star rating. In fact, you can see there's near unanimous optimism for this small-cap stock.

A stroll through CAPS pitches reveals a variety of different reasons to like Volcom. For example, here's what Slydo had to say: "VLCM's mantra may be 'Youth Against Establishment,' but their proactive approach to sagging fortunes at their largest customer (PSUN), was a textbook case of superior management. Exceptional management + hot brand = stellar investment."

Personally, I have found learning about Volcom fascinating as 2006 unfolded, so it's probably not surprising I nominated it as the Best Small Cap for 2007. Of course, we must all wait and see if Volcom can continue its torrid growth in 2007. There are some who are leery, thinking Volcom's brand might be just another fad, since young people are notoriously fickle.

If investing in a company like Volcom appeals to you, take a look at the other companies that have been recommended in Motley Fool Hidden Gems with a 30-day free trial. Tom Gardner recommended Volcom in the April and September 2006 issues of Hidden Gems, which boasts a total average return of 45% vs. 20% for the S&P.

Further anti-establishment Foolishness:

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Alyce Lomax does not own shares of any of the companies mentioned. Pacific Sunwear is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.