Stock of the Week: If the Shoe Fits… Invest in It!
Alpesh Patel|February 10, 2023
Casual is in…
At least according to this global shoe manufacturer.
With annual sales of $3 billion and double-digit revenue growth, it has proven to be resilient to our cost-of-living crisis.
It’s forecast to grow three times faster than its industry…
And its CROCI – cash return on capital invested – is absolutely huge at 39%.
The numbers certainly aren’t ugly with this shoemaker (though I think its products are).
And that’s why it’s our Stock of the Week.
Get all the details on the stock – including the ticker – in my latest video.
Click on the image below to watch it.
Hello, Manward family. I’m Alpesh Patel. I’m the CEO of a hedge fund and also a private equity fund. Together with my team, as you know, each week we come up with a Stock of the Week. And I’ve got an interesting one for you.
At first sight, you might think, “That doesn’t make sense.” But actually the data does. Go with the data, not the narrative.
The company in question is one you’ll all have heard of: Crocs (CROX). You know, they make those ugly shoes. And at first you’d think, “Retail? In a cost-of-living crisis? Are you crazy, Alpesh? With inflation problems, energy problems, war… you’re going with a retailer?”
Let’s look at the data on this one. Well, you might know it as the ugly shoe manufacturer. That’s how I have come to think of it. What I didn’t know is it is of course listed on the Nasdaq and so has been benefiting from all the index trackers, which are going long on technology because many of them buy the Nasdaq Index, and that helps this.
But that’s not the reason I’d want to get into a stock like this.
It operates in Asia, Europe, the Pacific, the Middle East and Africa. In fact, it operates in 85 countries through wholesalers, retail stores, e-commerce sites and third-party marketplaces. So it’s globally, geographically diversified.
Global sales were more than $3 billion. It’s aligned with global megatrends – and this is where it gets interesting – such as casualization and personalization.
As per 2022 Q3 results, the brand generated $715 million in revenues. That’s an increase of 14.3%… 14.3% increase despite everything going on in the world.
Okay… but is it forecast to grow faster than the general footwear and accessories industry? Yes, it is –almost three times as fast. Fine.
Let’s dig a little bit deeper into the various numbers, shall we?
On my Growth-Value-Income number, it comes up as an 8. What does that mean? Well, it’s a proprietary algorithm I use to evaluate companies based upon their valuation – so P/E ratio, for instance, share price, basically its profitability – and also on revenue growth, dividend yields, cash flow growth, those kinds of factors. And then we put it into an overall score. We’ve got 8 out of 10 on this one. Anything above a 7 wins.
Cash return on capital invested is 49%. That is stonking and very, very large.
Why is that number important? Well, the link above will explain exactly why that’s so critically important. It’s a number used by Goldman Sachs Wealth Management and Deutsche Bank for their wealthiest clients.
Sortino is 0.5. It’s a measure of risk versus reward, and anything above 0.3 I’m happy with. So this one compensates me for the risk, or volatility, of the share price.
The volatility is relatively high at 38%. Can’t have everything…
Return alpha – in other words, outperformance of the market – is very strong indeed.
You can see turnover is going in the right direction. Yes, I know borrowing’s increased as well, but then again, so has operating cash flow. Assets… increased. Clearly they’re doing something right. Profits… up.
So I like all of those things.
Turnover is forecast to grow 53%. Profits before interest and tax are forecast to grow nearly 40%. Pretax profits are forecast to grow 25%.
There’s a lot of growth in here. What about valuation?
The forecasted P/E multiple is 11.6. That’s relatively cheap. Of course, it’s not a technology company, but it’s still relatively cheap even for the sector it is in. So a lot of things going for it.
Of course, there’s a bit of borrowing out there, but the company seems, through cash flows, to be able to adequately manage that.
What about the stock price? Well, we’ve had the nice little upward trend for the last nine months. And that’s resulted in some of the indicators I look at – like the monthly MACD, a monthly momentum measure – as bottoming and probably likely to turn upward now.
It’s undervalued – only by about 20%, but then again, these companies do tend to overshoot as well.
It’s really the growth figures. Now, depending on where you look, earnings are forecast to grow 16.5%. Depending on which analysts or group of data you look at, those figures can vary. But one thing’s for sure: Earnings are forecast to grow.
Yes, profit margins have been hit somewhat, but that’s factored into the price. So I’m not so worried about that.
Debt isn’t well covered by operating cash flows, but it’s adequately covered. So again, not too worried about that one.
Hope you enjoyed this. Gives you a bit more of an insight into how exactly we pick stocks in GVI Investor. This is just a “tip of the iceberg” insight for you into that.
So thank you very much and see you soon, Manward family.