…of negativity.

A brief sampling of my posts will tell you that I don’t like hot or popular stocks. The exception here might be infrastructure, but with Chicago Bridge & Iron (CBI) at $5 billion in market cap now, there is simply less upside in those stocks now.

I mention this for two reasons: the run-up and subsequent slaughter in Crocs (CROX), and a pair of posts from NYU student Neal Sangani. I don’t know Neal, but he seems like an exceptionally bright guy and this is an open invitation for him to write back over here to defend CROX, or otherwise. Neal is part of Stern’s student investment club, and he talks about the process of pitching a stock like CROX to fellow students. In doing so, he raises several good points about the growth/value dilemma.

His first complaint is that students are often too opposed to buying stocks 52-week highs. Point taken. Because I look for things that have been sold down too far, I normally am looking at stocks at or near the bottom of their trading range. At the same time, 52-week range is irrelevant information - it is just a point of reference, as I tried to demonstrate when talking about all-time highs on the indices. The exception to this was a stock like copper producer Freeport McMoRan (FCX), which I thought was a great buy when it was at a 52-week high around $65 in late April. This was an easy decision to make because insiders at Freeport were all over the stock at $65 and it was trading at less than half the multiple given to peers. FCX is now above $110.
The situation at CROX is different. In the last six months, Crocs insiders have registered 44 sales totaling 2.8 million shares. Does that constitute a high degree of confidence in continued success? The insiders’ personal financial actions say no. Neal seems to feel insider selling doesn’t matter. I’d say most times it is of questionable relevance because there is no significant pattern, but it should certainly be another data point one considers. He does note, however, that Crocs’ Board voted to buy back 1 million shares yesterday, or 1.22% of outstanding. Crocs does have a fairly strong balance sheet with a 2.7 CA:CL ratio and $75M in cash and equivalents, but this repurchase would hardly offset the 4.4M increase in share count year-over-year.

The real issue with stocks at any level is whether or not they are worth more or less than they currently trade for. Neal likes to knock the “DCF enthusiasts” - consider me guilty - for nonsensical projections, arrogance… ok, I’ve seen it all from the Apple (AAPL) comments… but I think Neal overlooks one important thing you can do with DCF models - reverse engineer the current stock price into a set of implied expectations, like I did here. In fact, I much prefer this method to trying to arrive at a “target” because the accuracy of the current implied assumptions is what matters. Neal, if you can stomach working with a DCF model in Excel, I’ll write one up and you can give us assumptions to show us how wrong we are.

Now, Neal’s first post was written before CROX got killed (-35%) following earnings. Is there an easy explanation for this? Not as far as I can see - the earnings weren’t a blowout (66 cents EPS vs. 63 consensus), but the numbers and guidance ($825M revenues for 2007 vs. $835M consensus) were solid. Now, if we judge from the reaction to the otherwise-good results, what do we conclude? I would say it becomes obvious that CROX got caught in the hands of momentum traders enthused with the growth rate and the apparent lack of attachment to credit/homebuilding/the dollar/oil, and everybody rushed in. This is why I don’t like momentum stocks, especially momentum stocks trading at a lofty valuation, no matter how good the forward P/E multiples may be. When no margin of safety exists, it doesn’t take much of a slip to see some pretty terrible outcomes. You don’t lose money by not gambling.

Personally, I look at a stock like CROX more with amusement than anything else. I’m not interested in owning a company that makes gimmicky products that have just caught on. Ben Graham had it right: “The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.” Will Crocs become an enduring brand, or (with apologies to Stephen), is it another Heely’s (HLYS)? I don’t like the betting odds, so I won’t bet - it just isn’t worth it either way, in my opinion.
On the other hand, I might have to speculate that the Patriots will rout the Colts this weekend…

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