Is Crocs a Better Buy Than I Expected?

On the way back from a long-planned family trip to Vail last weekend, we stopped in to shop at a Crocs (NAS: CROX) store. I'm writing about it because I'm surprised by what I found, enough so that I've decided to make a bullish CAPScall on the stock.

Longtime readers will be surprised by that last phrase. I have an ugly history with Crocs. Three times from 2006 to 2008 I made calls in CAPS, and each time I came up a loser. My worst call came in September 2006, when I rated the stock to underperform.

"Going back to the well on this stock. I realize it's the new new thing in footwear but the secondary offering, which is designed only to enrich management and its pals, tastes about as good as spinach-flavored ice cream. (With, or without, the e coli.)," I wrote at the time.

I closed the position in May 2007 at a near-50% loss, after the stock had risen to $28.33 a share. If only I'd had the guts to double down on my short-side call ahead of a sharp sell-off the very next year. Alas, I didn't.

Why this time is slightly different
As much as I've been bitten by the resin croc, you might think I would want nothing more than to distance myself from Crocs. And yet I've been a customer for years. Our weekend visit to the store was to replace my broken pair with an updated style.

I'm thus far delighted with what we settled upon: a brownish pair with suede tops that look like business shoes when worn with khakis. Adjustable straps for the heel make the design especially comfortable. But they weren't cheap, running about $50 for the pair.

As a buyer, I'd prefer a discount. But as an investor? I had to marvel. Crocs has established pricing power on par with premium peers Deckers Outdoor (NAS: DECK) and Nike (NYS: NKE) . Indeed, you might be surprised to learn that, of the three, it's actually Crocs that boasts the best gross margin.

And that's important. We've long presumed that Crocs was a fad, and that the concept wouldn't last without attracting a broader customer base. Not so. By employing greater creativity within the popular options it does have -- adjustable backstraps for men's shoes, for example -- Crocs has been able to reignite growth and return margins closer to where they were in 2007, before the crash.

Does that make the stock a buy? Honestly, I'm not sure. But with Crocs stock selling for a fraction of the 18% annualized profit growth analysts expect over the next five years, resulting in a PEG ratio of just 0.67, there appears to be more upside than downside at current prices. And that's enough to get me in with a long-side CAPScall.

While Crocs is undoubtedly improving, our Foolish analysts rank another retailer as the best stock for 2012. Intrigued? Click here to get a free copy of their research, but hurry, the report is only available for a limited time.

At the time thisarticle was published Fool contributor Tim Beyers is a member of theMotley Fool Rule Breakersstock-picking team and the Motley Fool Supernova Odyssey I mission. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.Motley Fool newsletter services have recommended buying shares of Nike. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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