“What CNBC Isn’t Telling You”

by Travis Johnson, Stock Gumshoe | June 15, 2007 4:01 pm

This is a quick and easy one — lots of readers sent it in, and it’s from Navellier’s Emerging Growth[1] service, which we’ve seen a lot of teasers from in the past.

The argument for Emerging Growth is based on the success of their Hansen recommendation — which was certainly a good one, as everyone who has been around the market at all undoubtedly already knows. But energy drinks are last week’s news, right? What’s the next big thing?

Well, Navellier said it was covered by CNBC, but he said they didn’t tell you the real reasons why this stock is going to be a world-beater.

Here are the tips he gives for what he thinks will be Emerging Growth’s next 10-bagger:

216% sales growth and 258% earnings growth. Both numbers beat analysts’ best-guess by 25%. The stock is up 87% in the last 3 months-but is only just beginning a phenomenal run.

They make “a shoe that you don’t have to be an athlete to feel comfortable in.”

They have a “moat.” … in Navellier’s words, the way to success is to “Make the shoe out of resin that molds to the wearer’s foot, and guard the formula with your life. Use licensing agreements to ensure that international sales grow too fast for knock-offs to catch you.”

And analysts don’t know much about this one yet.

So of course, without even taking the Thinkolator out of the box, the Gumshoe can tell you that this new Emerging Growth recommendation is certainly …

Crocs (CROX)[2]

I’ve got a pair of those myself, though I’m afraid I don’t have any of the little licensed character or decorative jibbitz. I like them just fine.

I don’t necessarily understand the rapid and massive growth, but I do certainly see that everyone I meet under the age of 20 has at least one highly-accessorized pair, and many adults have some for puttering around the garden or walking the dog. And if the few analysts who do follow this one are correct, it’s not as expensive as I would have guessed it would be — the forward PE is only 11, though I can’t vouch for those estimates. The trailing PE is pretty decent, too, at 22.

It seems that the market must have some qualms about their future growth, which I share to some extent, and those qualms are very likely based on the potential gutting of the market by knockoffs and/or the trendy nature of the shoes. I

f you’re interested in investing in this one, I’d take a moment to review the corporate history of Deckers, which has seen a pretty wild ride with its Teva and Uggs brands that were each equally “must have” footwear back in their day. When Teva’s came out, there weren’t any similar “action sandals” around, and when Uggs came out they were the only shearling fashion boots … but both markets are very crowded today, even as those brands do arguably maintain at least some premium. And while those brands have gone up and down over the years, Decker’s has overall been a pretty phenomenal stock, especially recently.

One thing that might significantly alter this picture is their current patent situation — they do have some patents on the “dress” of their shoes and their manufacture and design, and they have been a pretty litigious company in filing suit against a dozen or so knockoff distributors, retailers and manufacturers … but I don’t know how those patents are holding up so far in court, or whether companies will be able to effectively work around them in the long run with design tweaks.

So … I must admit to being a little interested in CROX, since the shares are cheaper on a PEG basis than I would have guessed they would be … but I do also note that, as happened with Teva before them, you can already buy very similar resin clogs from dozens of different companies, including biggies like LL Bean, Land’s End, and etc. Whether Crocs will ultimately succeed with their fast international growth and continue growing their licensing deals (they’ve got tons already — Warner Brothers, Nascar, Marvel), and will through any means necessary protect and differentiate their brand and/or their patents, I don’t know.

Crocs shares just split this morning, by the way.

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