Crocs in Review.

I haven't done one of these in depth reviews of a stock since last March. Be as that may, and many of you know how my emotions got the best of me on that Countrywide trade, but let's not rehash any sore wounds right now.

I am concentrating on Crocs (Crox), an upstart company that has the patent rights to the Croslite material that is the heart and soul of their rather trendy foot wear. Some would call them ugly and some would call them cool but most everyone would agree that this shoe is one of the most comfortable bar none! Their line of products target sandals, slippers, flip flops, as well as boating deck shoes to other more main stream shoes planned for the future. But make no mistake about this, it is not the funky sandals that the company makes that is the heart and soul of Crocs Inc. It is the Croslite, a proprietary resin polymer material that is in all Crocs branded shoes. What is so impressive about this material is that it can serve as the insole of the more mainstream shoes to act as an orthotic (orthopedic foot insert device) that not only gives support but aid in cushioning. In fact, depending on where you read the data, Croslite can reduce anywhere from 39% to 6% of normal pressure in the feet during standing and walking. This makes it popular among health professionals (nurses, physical therapists, doctors, and other allied professionals). There has been a ban or a threatened ban on Crocs material in Europe because it was thought to cause electrostatic damage to heart monitors and telemetry units. As it turns out, Croslite did not cause these issues but rather immitation brands made of cheap plastic caused the static electrical discharge. I am in the health field and thus far in my state (Arizona), I have not heard of any incidents, but they are everywhere from ERs (Emergency Rooms) to OR's (Operating Rooms). Of course, I swear by my Crocs as well.

But, is this shoe company just a fad? To which I reply, who cares? Right now, no other company can duplicate the Croslite material but many are trying to immitate without success. Does that guarantee long term sustainability? No. But nothing is for certain in this world of high momentum stocks and if you chase these stocks like I do for a living (at least partially), then you always have to consider that nothing in this universe lasts forever. So, I don't care if Crocs will sustain itself in 10 years or 3 years. What matters to me most is the following:

1. Disruptive technology of Croslite.
2. Burgeoning target customers encompassing wide age spectrum and gender.
3. Wide moat around technology.
4. Early expansion of growth and revenues.
5. Aggressive management with investor friendly posture.
6. Skepticism.

I won't go into how great Crox's earnings have been for the last 3 quarters. We all know that Crocs is kicking major butt in the fundamentals arena. But I will concentrate on what matters most to me regarding this stock.

1. Distruptive Technology of Croslite: Many would argue that anyone could duplicate this material and make something even more comfortable. Some have even pointed out Birkenstocks as an example of comfortable shoes that ended up bombing due to fad issues. But the real genius of Croslite is that it has antimicrobial qualities, is durable, water resistant, and actually reduces ground reactive force while walking or standing. Croslite does not have to be relegated to the standard Crocs sandal or flip flop design. As Crocs expands into more mainstream shoe arena, especially the turf occupied by ever popular Deckers (DECK), the edge may be given to Crocs due to Croslite inner sole that can line these shoes giving a stylish shoes with the same benefits of Crocs sandals. Furthermore, if everyone realizes how Crocs got their start, they were a small time, boating shoe company. The applications of Croslite as far as shoes are concerned is quite far reaching. As Crocs matures somewhere down the road, they may license their technology to NIKE and other major shoe company much the same way Gore-Tex does to many apparel manufacturers. We are in inning 1 of this long drawn out roller coaster ride that is Crocs. I anticipate that there will be some bumps in the road but I just do not agree with the skeptics out there who think Crocs is just a passing fad.

2. Burgeoning Target Customers: Crocs affects all age spectrums from 1 year olds to 100 year olds. It crosses both gender barriers. It appeals to doctors to restaurant workers. The company has high return customers who will buy more than one pair generally. Due to their creative marketing and color choices, many children have taken customization to a new level with multicolored Crocs on each foot. Additional buy out of Jibbitz recently is paying huge dividends as it allows consumers to customize their Crocs even further. It is so hip right now among school children, many have been known to actively trade different Jibbitz. There is something for everyone. Now that the "noise" regarding Crocs has gotten a bit louder, many people are curious and will try it out just to see what the hoopla is all about. A sales person at Dillards even guesses that many first time buyers become repeat buyers.

3. Wide Moat Around Technology: Anyone can make a cushioning device from plastizote to Spenco inserts to Adzorbs etc... So, the actual relevance of Croslite as a cushioning device is pretty minimal. Where the moat comes to play is in the patent of this technology and the way it feels. Even skeptics will agree that Croslite has the effect of keeping the feet comfortable and supported. The material is low maintainence and can be used in all einvironmental extremes except fire. Birkenstocks cannot do that as their material is derived from Burkocork. A cork much like the corks seen in wine caps.

4. Early Expansion of Growth and Revenues: I will not post numbers here. Except to say that this is the beginning. Crocs has ambition to go global and is becoming a "brand" name.

5. Aggressive Management with Investor Friendly Posture: The Crocs management has been actively and strategically buying companies to help expand their gross margins and revenue. This is reflected in the robust EPS and PPS expansion. The recent acquisition of Jibbitz LLC, Ocean Minded LLC, EXO Italia. EXO Italia manufactures EVA (Ethylene Vinyl Acetate) based foot wear products and allows Crocs to expand and diversify its products from Croslite to EVA. EVA is what lines a lot of cushioning foam in many of the other foot wear products. This opens up another avenue for continued growth for Crocs. These companies were bought with minimal capital expenditure but represents very shrewd positioning by the Crocs management. Additional licensing agreement from Marvel Comics, Time Warner, Disney, NASCAR, NHL, MLB, and NCAA. More licensing deals are on the horizon and recent announcement of Mario Batali shoes for bistro type shoes will be a huge hit in restaurant industry. The recent split announcement of 2 for 1 is also indication of the management's committment to Crocs. Some have openly complained about insider selling, but this is not alarming as say (Countrywide's) and the insiders have huge owndership stake in this company and the most recent shares that insiders owned is above 25%.

6. Skepticism: In Wall Street, skepticism is a good thing. I always believe in the wall of worry. It means that the greater fool theory is not in force, yet. 3 analysts still rate this stock a sell, 2 a hold, 3 buy, and 5 strong buy. There have been very little coverage from the big institutions such as Goldman Sachs, Bear Stearns, etc... Last week JP Morgan rated Outperform and initiated coverage. So this is a good development but we are no where near the end of this run. I would say, when most major brokerages and institutions have initiated coverage with a "buy" rating or higher, it may be time to get out. That has not happened yet. Still many are still torn regarding the "fad" issue. Maybe it is. But again, skepticism is a good thing.

I anticipate that Crocs will run as long as this market rally holds. This rally is completely irrational and is completely contrary to economic numbers that points to a slow down. My theory (I never trade on theories anymore) is that the market is factoring in pick up in economy in the last 2 quarters of this year and is pricing that in. Many are on the sidelines and to their chagrin are seeing the indices and stocks march higher everyday. Eventually, the retail investors will succumb and the bears will cave in and that will be the time to get out and let nature take its course. Remember, skeptics are always right...eventually.