What's In The Croc Pot?
Today we hear from Wasabi on what's going on with Crocs.
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Controversial Bitcoin Miner Greenidge Generation Looks to Raise $22.8 Million (Decrypt)
South Korean Authorities Officially Void Do Kwon’s Passport (Decrypt)
YOU THOUGHT I WAS DONE TALKING ABOUT $CROX?
Hello Foot Gunners,
This is Wasabi.
Hal has asked me to write an article on my CROX thesis. The only problem is that I blew out of my position in the stock a few days ago...
This was driven by my wider market bearishness rather than a take on the business. In a normal macro environment, I would 100% continue to be long $CROX with options and shares.
So, I am going to lay out my overall thesis on Crocs and how I plan to play it going forward.
UNDERSTANDING THE CROX OF IT
The Crox investment thesis hinges on a few key points. Get these right and you could make a lot of money over the coming years, recession or no.
FAD? Here are some common things you may have heard about this brand. “Crocs is a fad” “Crocs are Ugly” “CROX is a Covid stock that will get crushed when everyone goes back to the office.” This narrative is partially why Crocs is trading at an astonishingly low PE of 7. (Compare this to On Running at 48, Nike at 30 or Under Armor at 15). The market is pricing CROX like it’s in trouble. If Crox is NOT in serious trouble, we have a big mismatch between market expectations and reality that bakes in serious upside to the stock once everyone else catches on.
HYPERCONSUMERS. Do me a favor and watch this Tik Tok. Does this look like a busted fad? To me, we have all the elements of what I like to call hyperconsumption. This is a product that is a) fused to the consumer’s identity and b) collectable. And Crocs is showing all signs that it gets this. They recently launched a new campaign (h/t @atnewby on Discord) to get email signups in exchange for a chance to win a pair of Crox. This is a tactic straight out of the direct response marketing playbook, which knows a thing or two about the value of hyperconsumers (extreme power laws, think 80/20 on steroids, more like 99/1 dominate the profits of most direct response businesses).
HEY DUDES The second part of the CROX story lies in the fugtastic loafers you see above. Unless you live in a Trumpy part of the USA you may have never seen these shoes. But, trust me, they are out there. Just do some searching on Tik Tok and you will see that they share a lot of the hyperconsumer dynamics of Crocs (buying multiple pairs, customization to match personality, etc). This is a make or break acquisition for Crocs and if they pull it off they will go from being a single engine plane to a 737. The extreme bull case here is the company has the DNA for scaling multiple hyperconsumer brands in the footwear industry.
DEBT - Crocs paid $2.5b ($2b debt, $500m shares) for Hey Dudes and it’s debt-to-equity shot up considerably. This is something to watch closely in a rising rate environment and part of the reasons for my short term caution.
HOW I AM PLAYING THIS
Currently, no position due to the macro situation. If the US goes recession mode and the consumer falls off a cliff, CROX will go down with everybody else, and the 7 PE will mean nothing.
Next earnings is on October 20. In the coming weeks, I will continue to monitor web traffic, google trends, social media, and options flow via Unusual Whales and look to load calls into earnings if everything looks good.
If there is a market crash (SPY down another 10-20%) I will go hard on this bad boy with LEAPS (in the money Jan ‘25 calls) and shares.
SOCIAL ARBITRAGE INVESTING 101
This article is informed by a new investing style I have been diving into recently. It’s called social arbitrage investing, and it was essentially invented by Chris Camillo who runs an excellent investing podcast called Dumb Money.
The core of social arb is finding a mismatch between market expectations (think wall street research, Seeking Alpha conventional wisdom, etc) and social trends that you can see, for example on social media, web traffic, or with your actual eyeballs.
If you want to learn more about this, I’d suggest Chris’s book Laughing at Wall Street and this podcast episode that has a much deeper dive on Crocs.
DID YOU LIKE THIS ARTICLE?
You may have noticed that this piece is a bit outside of the typical Foot Guns beat.
But we got to find something to keep us warm during this cold crypto winter…
If you would like to see more articles on Foot Guns about non-crypto investing topics, please hit me up on Twitter or comment below. Some topics I am especially interested in writing more about 1) social arb plays 2) nuclear energy 3) macro / geopolitical investing.
Cheers,
Wasabi
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