Option opportunity: Will the bears seize Crocs?
Today's Financial News - Posted May 5, 2009
The shoes are ugly, but they sure are popular. On Thursday we will learn if the Crocs’ popularity will be enough to lead it towards long-term prosperity. In the meantime, options writers have a profit opportunity.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): For a company with auditors that have “substantial doubts” about its future, shares of Crocs (NASDAQ:CROX) are soaring by incredible levels. In the last two days, the stock is up by more than 50%.
When I am on the prowl for the market’s most speculative investments, the search almost always ends with Sirius XM Radio (NASDAQ:SIRI) or Crocs. Now that the radio company has pushed its debt burden into the future, Crocs is getting even more speculative attention.
Talk to a shareholder (who is probably wearing the tacky, but comfortable shoes) and he will tell you the company’s business is booming, especially in Asia. It is true that the company’s products are popular and are available just about anywhere. I even saw a camouflaged pair at a local bait shop over the weekend.
But just because the shoes are popular does not mean the company has any shot at long-term viability. First off, you cannot expect something as ugly as those rubber shoes to become part of a long-term fashion trend, especially during a wicked economic downturn.
One of the most important factors facing Crocs going forward will be its ability to find the right size. Throughout 2007, the company’s sales grew by unpredictable levels. The only way the company could keep up was to borrow money and expand its production.
But the same thing happened to so many companies that do not adequately plan for success. As the current economic calamity rose above the horizon, sales across the companies 10,000 retailers reached a plateau and Crocs found itself with too much production and not enough demand. Even worse, it had a burgeoning debt load with few opens in a credit-constricted environment.
Crocs was forced to close factories, slow production and take drastic cost-cutting measures. Even with the action, the company remains too fat for its current growth. It will be a tough job for management to find the “right” size that makes creditors and shareholders happy, but if it does not do it, both groups are going to lose serious money.
A Croc versus a bear
Thursday is going to be one the most important days in this young brand’s history, especially for speculative traders.
The company is on the ropes. If the upcoming earnings report shows that rumors of strong oversees growth are having a significant impact on an imploding bottom line, this week’s run in share price may hold.
But if the news is not as cheery as today’s bulls had envisioned, whoa boy, stand back. The folks gobbling up call options expecting share price to overrun the $4 mark will wish they had bought a slew of protective puts.
According to current option prices, the expectations of bears and bulls is growing wider with every tick. June call options show potential valuations of $4.80 or so. Put buyers are looking to see $1.85. Big difference.
If you are looking to jump in on the action and take advantage of the growing hype, my advice is not to be a buyer, but a seller. By writing something like the September 5 calls (CZLIA) or even the September 6 calls (CZLIF), you can rake in strong premiums. Chances are you will be able to lock in that easy money when the contracts expire worthless (or at least worth less) in just over a month.
Even with all of the hype, shares of Crocs will not be trading above $5, and certainly not $6, in the next few weeks (even if you did buy when shares were at $92).
This is a buy the rumor, sell the news kind of play. Buyers, even option buyers, at these prices will get burned.
Next Article: Don’t hate me because I’m beautiful
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