Peril in Crocs Infested Waters

If ever something looked like a walking, breathing fad, it's Crocs. And by fad we mean both a fashion statement and an investment that's destined for a short and perhaps not-so-smooth ride. But given that the footwear maker keeps crushing analyst estimates and that its shares have soared sixfold since the company went public last year, Crocs is too tempting to ignore.

Founded in 1999, the company is a remarkable success story. It developed Croslite, a material that molds to your feet and makes you feel as if you're walking on Fig Newtons. Crocs' original shoe looks like a neon clog with Swiss-cheese holes.

A few years ago, against all reason, the shoe became a fashion statement and sales took off. For the quarter that ended March 2006 (Crocs' first quarter as a publicly traded company), the firm posted sales of $45 million. By the second quarter of 2007, sales had soared to $224 million. Profits have grown from 17 cents a share to 58 cents in that span.

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Circling vultures. Naturally, this has created high expectations among investors, who have bid up the shares to lofty levels. At $68 in mid October, the stock (symbol CROX) had a market value of $5.5 billion and traded at 27 times estimated 2008 earnings of $2.52 per share. Meanwhile, short sellers are circling Crocs like vultures, and insiders are unloading shares at a healthy clip.

But analyst Jeff Mintz, of Wedbush Morgan Securities, makes a persuasive case that the stock has legs. For starters, Crocs' classic style, which he calls "the ugly shoe," now accounts for just a quarter of sales. Crocs has been aggressively introducing more conservative-looking footwear. The company is also introducing a line of Croslite-based clothing. YouUd think a Crocs shirt would look like a wet suit with holes. But the material is spun into a yarn and woven into fabric.

Perhaps the biggest potential is overseas, particularly in Japan and Europe. Mintz says he recently saw a picture in London's Daily Mail of Prince William's girlfriend, Kate Middleton, sporting a pair of Crocs.

Still, Crocs' stock is in a precarious position. Sales growth won't have to decelerate much to cause investors to flee. If Crocs' classic shoes suddenly go the way of other footwear fads (think Heelys or Earth Shoes), shares could plummet. If ever there was a stock to unload at the first sign of trouble, it's a creature of fashion like Crocs.