Should You Add Crocs To Your Portfolio?

Several years ago, Crocs (NASDAQ: CROX), a maker of aerated so-called Croslite, plastic, clogs, was all over the place -- getting stuck in mall escalators across the country and making investors rich. Then Crocs crashed -- a victim of market saturation and cheap knock-offs. But after a 15.6% spike in its stock price Thursday, is Crocs on another roll? And should you buy?

Crocs went public in February 2006 and enjoyed a tremendous upward run that lasted until the end of October 2007. During that time, Crocs stock was on a tear that took it from $13.28 to nearly $70 -- a compound annual growth rate of 179%.

Alas, that steep rise could not last. And from late October 2007 to late March 2009, the stock plunged to a low of $1.11 -- losing 98% of its value. One of the problems was that Crocs was so popular that it had attracted competitors who knocked them off and sold the ersatz Crox for $4 a pair. And that contributed to a disappointing earnings report that knocked 60% off of Crocs' market value.

Since then, Crocs stock has enjoyed an even more spectacular rise on a percentage basis. The reason is that in recent years, Crocs has expanded from just rubber clogs to selling all types of shoes from sandals to hiking boots. If you had bought it then and held until now, you would have enjoyed a 2,686% return on your investment -- up at a nice 300% compound annual rate.

Is it too late for you to get in on this rise? The short answer is yes -- it would be very unlikely for Crocs stock to continue going up 300% a year. But is a smaller return on investing in Crocs still possible?

Here are four reasons why it might be:

• Great second quarter earnings report. Crocs earned $55.5 million, 72% more than 2010's $32.3 million, or $0.37 a share. Crocs' EPS of $0.61 a share were 39% better than analysts expected. Crocs' revenue spiked 29.6% to $295.6 million -- 5% more than analysts' forecasts. Its fastest growth was in Europe  up 50% and Asia up 37.5% -- while U.S. sales grew 16%. And Crocs raised its third quarter EPS guidance to $0.40 -- 20% above analysts' expectations.
• Cheap stock. Crocs' price to earnings to growth (PEG) ratio of 0.80 makes it cheap (a PEG of 1.0 is considered fairly priced). Crocs' P/E is 26.2 and its earnings per share are expected to grow 32.6% to $1.48 in 2012.
• Growing with solid balance sheet. Crocs has been growing with decent profit margins. Its $790 million in revenues have climbed at an average rate of 22% over the last five years and its net income of $68 million has gone up just slightly -- representing a 9% net margin. It has no debt and its cash grew at a 22% annual rate from $65 million (2006) to $146 million (2010).
• Out-earned its capital cost. Crocs is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half 2011, Crocs’ EVA momentum was 3%, based on first six months' 2010 annualized revenue of $790 million, and EVA that improved from $16 million annualizing the first six months of 2010 to $43 million annualizing the first six months of 2011, using a 12% weighted average cost of capital.

If you invest in this stock, you are not likely to earn 300% annual returns -- but with its expectations-beating earnings and revenue growth, Crocs stock has plenty of room to rise.