Crocs Blows Up, Is Deckers Next?

Ok, here's the obvious one.... first, CROX Monday afternoon from a cut in expectations (no, really, there's no slowdown in the economy, right?) hammered their stock like a freight train:

That ain't good.

So what is CROX? You know: Fad shoes. Cheap plastic crap made in China and sold at a premium here in the United States (typically around $50/pair with a production cost that is almost certainly in the single-digit range.)

So who else might get pounded like this?

Hmmmm.... maybe DECK?

Now let's look at the comparisons. Deckers has a crazy 22.5% presumed "earnings growth" estimate for the entire next five year period. They have an operating margin of 21% (nice, when you use slave labor to build UGGs - you do know those are made in China, right? Yes, I know the tag says the wool is from Australia - look at where they're made.)

So let's back into this. We have $1 billion in revenue and a 5 year forward 22.5% presumed EPS. With a 21% operating margin if ratios stay constant in five years they would nearly triple their revenue over that period.

All from fad pieces such as UGGs?

I dunno man.....

Look, the PEG ratio looks reasonable at about 1, but this presumes the forward growth numbers are reasonable. If you believe we're entering the "recognition" phase of a significant slowdown in economic activity both here and in China then these forward estimates look fanciful - and that's being kind.

They took a relatively small hit on the CROX release, but with a stock price right near $100 there's a lot of meat on this bone. What makes it a tough play is that options are expensive - the implied volatility is ridiculous, even going out a good ways into the early part of 2012.

There's always danger in shorting a chart that looks like Decker's; they have an apparent failed breakout beyond a recent double top. If that reverses, and earnings are not due for ! a bit ye t (on the 27th), you're going to get reamed. On the other hand if you believed in the thesis of Netflix falling apart you've been paid to a ridiculous degree for having the balls (and margin capacity!) to get short and sit. With DECK paying no dividend there's no carrying cost beyond the borrow fee (if any) but there's plenty of risk on a breakout over the recent high about 10% up from here. Good money management is an absolute must if you get involved but so is conviction - you have to believe that the consumer is (once again) running out of gas and this is going to show up in stocks like DECK in the next few months. You're supported by things like the Empire Index, the "Pulse" numbers on diesel fuel (down) and containers coming into Long Beach (down); retail sales for September is not all that impressive but isn't clear on a breakdown.

Finally, on a day where the tape was crap -- just a long slide with no good short entries after about 4:00 AM -- it feels like chasing to go after it now, with CROX putting that warning on the board.

But then again, sometimes the most-profitable trades are the toughest ones to put on.

Disclosure: No position at this writing but definitely considering it.....