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Revision as of 05:45, 4 March 2009 by Judy0000 (talk | contribs) (When Fads Unravel)
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When investing, it can be difficult to determine whether the fired-up growth stock you're eyeing is actually just a fad. People who invested in Crocs at the stock's crazy highs have learned the perils of such a situation. The shoe company's fourth-quarter results provide little reason for anybody to believe that Crocs shares can regain their former overpriced glory.

Crocs did beat analysts' expectations. However, it reported a net loss of $33.2 million, or $0.40 per share, compared to a profit of $38.3 million, or $0.45 per share, during the same period last year. The fourth-quarter net loss included major foreign exchange rate losses; without those, the company still would have reported a net loss of $17.1 million, or $0.20 per share. Revenue plunged 43.9% to $126.1 million.

Crocs also forecast a net loss for the first quarter, guiding in the range of $0.32 to $0.17 per share.

The company emphasized its improved cash position, accounts receivable, and inventory levels, and these are of course important elements. Cash is king these days, and Crocs' major inventory buildup and mounting accounts receivables hinted at big trouble on the way when the stock first began its downward spiral. However, Crocs' constant emphasis on the poor economy's negative impact may be a bit misleading. Although I have no doubt that the consumer spending slowdown is taking a bite out of Crocs, it's also been clear that the fad element of the company's shoes is rapidly unraveling. That implies that the heady growth of yesteryear is over, even when consumer spending revives.

Faddish stocks like Crocs and Heelys are dangerous for investors, even if Microsoft founder Bill Gates apparently believes that Crocs is a good stock.

Navigating the dire economy won't be easy for discretionary stocks like Crocs. Fellow footwear maker Skechers recently got trampled. On the other hand, these tough times could provide investing opportunities. I've wanted to take a deeper look at Deckers lately; its UGG boots may be a fad, but they've shown remarkable staying power for years now, remaining hot even through last year's holiday shopping season.

But in Crocs' case, I continue to firmly advise investors to steer clear. Even though it may look cheap trading in penny stock territory, I don't believe it will ever come near its former growth rates. Buyer, beware.

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