Unloved Crocs Still Has Bite

My formula is to buy stocks that are down and compellingly cheap in companies with solid fundamentals. Typically there is some short-term hiccup or expected issue that has driven the share price to such attractive levels. We in the investment business call that "hair." My stocks are undervalued because they have hair on them, especially at the bottom.

Currently, I am buying one of the hairiest stocks in the world today. The company is Crocs(CROX Quote), and the idea is insanely controversial. The stock is down and too cheap to be true. Unless, of course, the business tanks. Right here, Crocs represents a bimodal outcome. If the company resurrects its growth rate and fixes its inventory problem, the stock will soar. For the stock to drop from here, the business must collapse. I don't see that happening.

Why? I love the product. I love the Santa Cruz style shoes so much, I bought three pairs. If the rest of the world discovers the same comfort and durability I did, Crocs can resume its powerful growth track. At six times forecasted earnings, the stock is screamingly cheap. Should Crocs resurrect its 20%-plus growth, the stock would soar.

There's more to Crox than those appearance-challenged clogs with the holes, though Crocs sells them by the tens of millions. For men, it offers the Santa Cruz, and for women, the Celeste, Cleo or Capri. This product is far more than a fad.

Don't expect any help from Wall Street on this. The Street blew it big time. At $70, every single analyst had a buy on Crocs. After a one-quarter hiccup, when the company missed sales and earnings forecasts, every single analyst downgraded the company. At $10, everyone on the Street has some version of a sell on the stock. In fact, Wall Street now has a vested interest in looking for the bad news in the story in order to support its unanimous thumbs-down on the company. The $30 million short position in Crocs by hedge funds buys a lot of negative comments and rumors from Wall Street.

Going Global

Here is my take on the fundamentals. We all know that the U.S. faces a challenging retail environment. Few have been more negative on the domestic consumer than yours truly. And I remain short of companies with U.S. consumer exposure. I don't expect much growth from Crocs' domestic business. But with the success of all of the new products, I do expect the company to sell a lot of shoes here.