The Battle Over Crocs

This column was originally published on RealMoney on Feb. 15 at 1:58 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

With its fourth-quarter earnings announcement less than a week away, Crocs (CROX) remains one of the most interesting "battleground" stocks in the market right now.

Shares have pulled back sharply (about 8%) since setting a new 52-week high, $58.57 intraday, last week. While short-term traders try to predict the stock's next move, long-term investors have to wonder whether Crocs' lofty valuation leaves room for further gains or whether the substantial amount of short-sellers will be right in the end.

When I originally wrote about the shoemaker in early November, its shares were trading just under $40. I noted that the short-seller bandwagon was getting awfully crowded, increasing the potential upside for longs through momentum from massive short-covering. Shares have not traded below $41 since then.

At the time, the overall short position in the stock had increased to 38.6% of the float from just under 20% three months earlier. With shares now 34% higher, shorting CROX remains popular; 36.3% of the float was short as of Jan. 9.

The strategy makes sense -- any earnings misstep or indication that the company's shoes are nothing more than a fad could send shares plummeting -- but as I mentioned months ago, having such a large number of shorts already in the stock makes a big selloff that much more unlikely. In addition, the company's new product lines and growth plans could enable Crocs to beat earnings expectations for a number of years.

Both Crocs management and the investment community are keenly aware of the fate of companies built on the shaky foundation of a "fad" product. The retail space has a history of products whose popularity skyrocketed only to plummet in devastating fashion as consumer tastes shifted. Examples include everything from Razor scooters to karaoke machines. Apparel stores are also notoriously vulnerable to such shifts, as consumers' notion of what is trendy is based on the premise of changing demand.