What a fantastic six months it’s been for Crocs. Shares of the company have skyrocketed 56.1%, hitting $130.37. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Crocs, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Crocs Will Underperform?

We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons we avoid CROX, plus one stock we’d rather own.

1. Weak Constant Currency Growth Points to Soft Demand

We can better understand Consumer Discretionary - Footwear companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Crocs’s control and are not indicative of underlying demand.

Over the last two years, Crocs’s constant currency revenue averaged 1.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Weak Operating Margin Could Cause Trouble

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Crocs’s operating margin has shrunk over the last 12 months and averaged 14.1% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

Unfortunately, Crocs’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We see the value of companies helping consumers, but in the case of Crocs, we’re out. Following the recent surge, the stock trades at 9.5× forward P/E (or $130.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Crocs

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