Beyond The Headlines
Immune to Ridicule
In the early years of my investing career, one particular stock attracted the most ridicule. I remember how various junior analysts would mention it to the more senior analysts and portfolio managers. It was the epitome of a bad idea, a fad, a laughing stock even. My contrarian bone must have been already developing at the time. Somewhere in the back of my mind, I thought, what if they are wrong?
From a near bankruptcy over a decade ago, the business persevered. The stock rose from $8 in March 2020 to $170 today and reached a $10 billion valuation (Source: Bloomberg). It’s not a tech company; it didn’t give us a self-driving car, a miracle drug, or a comfortable ride to Mars. It sells the same product it started with 20 years ago. The business not only made a comeback but grew and turned a nice profit, too. Some even believe that a former alleged fad gained a cult following of sorts, and if that wasn’t enough, the brand became a premium brand.
What’s amusing about investing is that you rarely know when the story is really over, and the least likely heroes offer the biggest payoffs.
What happened? The big operational changes from three years ago paid off and helped them navigate through a tumultuous pandemic reality. What’s more, that very pandemic lifestyle shift brought more people to the brand and the product. Comfortable ugly shoes were apparently precisely what we needed the last two years! Who would have thought?
What stock is it? Crocs! – a company famous for its bright-colored rubber clogs. I have never owned a pair, but I owned and recommended other shoe brand stocks in the past. Some have done well, some struggled. I’ve always had an affinity for consumer products and services, and I knew that finding a genuinely lasting niche in that space was quite a feat for any company that tried.
Crocs became a definition of a fad in the eyes of many investors. The company experienced quick success, a hot IPO with a fast-rising stock, not unlike many other recent hot IPOs. They couldn’t keep up with the demand and expanded aggressively. The 2008/2009 recession brought an end to it. In the first years on the stock exchange, its price rose five times; it lost almost 99% in the following two. It was a $1+ stock flirting with bankruptcy.
I remember walking past their Manhattan store, wondering how much longer they would be around. Customers seemed to have fallen out of love with their products as quickly as they initially embraced them. This is nothing unheard of, especially in shoes, apparel, or any other consumer product categories.
That’s what we call a fad. Fads come and go. Some companies can be too quickly dismissed as fads, while others can be mistakenly taken for having a cult following, while they turn out to be short-lived fads.
From an investment perspective, it’s a dangerous territory that could also be full of great potential and opportunities. Any analyst trying to recommend Crocs when it was a $1 stock would have been ridiculed. The company wasn’t out of the woods five or even ten years after the 2008/2009 recession, and it only closed its manufacturing and rethought its retail footprint in 2018. It was a treacherous path of many attempted revivals.
When March 2020 came with the abrupt market sell-off, Crocs’ stock price dropped below $10, still 1/6th of the 2007 record high price (Source: Bloomberg). The brand and the company weren’t on my radar, and I still remembered it as one of the most ridiculed stocks ideas I have ever heard of.
Many years have passed, I almost forgot about it. Only recently, I came across it on three different occasions. First, I saw a few people wear their shoes, and then someone mentioned it in a newsletter as an unlikely turnaround story. Finally, I read a headline about this unexpected pandemic winner. I took a fresh look, and I was intrigued by it, but more as an investment case study that could offer some great lessons rather than an actionable stock pick.
I have never owned Crocs, and as a firm, we never invested in it either; we have no immediate intention to invest in it now either. There is nothing contrarian about it anymore, but it didn’t stop us from learning something from this experience.
Reading up on Crocs and its remarkable, even unbelievable journey, I thought of those days over a decade ago when seasoned investors ridiculed the stock and fashion aficionados ridiculed the shoes. I’ll think twice next time I hear someone laugh at an investment idea or product.
There might be some surprising winners where few dare or care to look for the simple reason of being ridiculed for it! Being more immune to ridicule is an excellent lesson for any stock picker young, and seasoned. Over the years, we owned many stocks that at times earned us some smiles. We trusted our judgment, though, and pursued some unlikely stock picks. Next time you see a stock in your portfolio that makes you smile or even laugh think of Crocs – we might just be on to something.
Happy Investing!
Bogumil Baranowski
Published: 12/9/2021
Disclosure:
The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.
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