by John Jagerson | April 23, 2014 10:05 am
I have never owned a pair, but routine visits to the doctor’s office and hospitals over the last several years have introduced me to the ubiquitous Crocs shoe. Crocs (CROX) now makes shoes for all seasons and in a large variety of styles but its brand will always be associated with those plastic shoes with the holes in the upper.
Unfortunately for the company, the shoes are still not exactly considered ‘fashionable’ and growth in the stock in 2007 was the very definition of a bubble. From 2007-2008, CROX’s price popped sending the price down from $75 per share to a low of $.79. That event was obviously disruptive and share-price volatility has remained very high ever since.
Crocs has attempted to reorganize and grow internationally with mixed results. However, I will confess that it defied my expectations by surviving the 2008 debacle and management deserves a lot of credit for that. I thought they would go the way of Heelys and, more or less, disappear.
Despite the heroic recovery and a fairly solid balance sheet, CROX has been unable to reliably grow both top and bottom lines over the last few years, which has contributed to continued stock volatility. Until the end of 2013, CROX looked more or less like a very risky “value trap.”
Companies stuck in the no-man’s land of a strong financial position but no growth have to start returning capital to shareholders or they will lose market value. Being a no-growth income stock isn’t a bad thing but Croc’s management and the board resisted the idea partially because they feared sparking another selloff.
If you can’t grow, don’t need capital, won’t pay a dividend, and haven’t sold your company to a larger firm, there are really only two other things you can do to reduce stock volatility in the short term –reduce the float or go private. CROX opted for the first strategy by selling $200 Million in 6% convertible preferred shares to Blackstone (BX) in a deal announced Dec. 29, 2013. According to management, the proceeds from the sale will be used to buy back CROX stock “opportunistically.”
This actually is an interesting deal. The preferred shares are convertible to common at a price of $14.50 per share, which should put a short term floor on the price of CROX common shares. As you can see on the next chart, CROX already has long-term technical support at that level and has started to bounce again. We expect a likely rally back to $18 resistance or higher before the next earnings report slated for the end of April or early May.
The company reported 2013 full year results in February. Although BX wasn’t involved in the firm as a preferred shareholder during most of that period, the influence was tangible. Management has decided to focus on driving bottom line profits rather than topline growth, and the CEO is leaving April 30. New management and rising profits could give the company another life – or at least convince short-term traders to bid the stock up over the next several weeks.
Historically speaking, on average, these kinds of deals do drive the price of common shares higher in the short term. When the injection of capital facilitates a turnaround – think about Warren Buffett’s preferred share investment in Bank of America (BAC) – the gains can be very large and long-term. We don’t expect CROX to start driving long-term growth in its share price, but we do believe that the recent bounce off $14.50 offers an excellent opportunity to gather some short-term profits.
We think management is probably right. The capital injection and CROX share-buybacks will support the stock’s price and reduce volatility. After the initial ramp following the deal in December, prices cooled off a bit but investors will be looking for excuses to buy again following the announcement of new management and second quarter earnings, which gives us an opportunity. We recommend setting stop losses under $14 per share with an initial price target at $18. Because this is likely to be a short-term move, a long call option with a June expiration could be ideal.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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