Revisiting Crocs (CROX), Fallen Growth Stock

Would you invest in the company which makes and sells these shoes?



If you didn't know much about these shoes, many of you might say, no, you would not invest in the company which makes these (ugly) shoes.

However, since it's IPO in early 2006 to October 2007, the stock has gone up from a low of $10.16 to a high of $75.21. How could a stock which makes the footwear above have a stock price that goes up to very high levels. Certainly, this must be a fad.

But Crocs (CROX) bulls say that everyone is using them from doctors to children to nurses. They say there is an international growth story, and that they patented their special soft "Croslite" rubber material.

On April 17, 2007, Wallstrip, the Financial Video Blog, created a good video on Crocs (CROX) and the Crocs Phenomenon:

WallStrip April 17, 2007 Video on CROX

However, the skeptical investor who thinks that rise of Crocs (CROX) with its "faddish" product is unwarranted, see their side validated when on November 1, 2007, CROX reports bad earnings and guidance. The conference call mentioned problems ramping up manufacturing and distribution to meet higher demand in Europe and Japan which cost the company about $30 million in lost sales. The conference call also mentioned the company was experiencing distribution issues, and seasonal slowdown due to the seasonality in Europe and Japan. The stock takes a huge hit.

CROX's stock price is further hit in January 2008. Rocky Mountain news reports problems with Crocs (CROX). The European Union declared one of CROX patents is not valid. Also, Crocs has distribution problems, and inventory is growing faster than sales. In April 2006, Crocs filed lawsuits against 11 companies citing patent infringement. (This foreshadows problems with copy-cats.)



So is CROX a buy right now? CROX currently has a forward PE ratio of 10.7 and there is still international demand. However, the stock has lost its momentum, and there are enough problems right now to consider.

And for those investors who are still skeptical, and still believe CROX is a fad, there is nothing wrong with just staying away from this stock.

Yahoo/Google Revisited, Quick Valuation Update

We are in the middle of the great Information Revolution and some companies have to make sense out of all the data in the world and make it useful to the end user.

Google (GOOG) is an obvious play and so is Yahoo (YHOO).

GOOG is the one which is most likely a better investment.

GOOG has a forward PE of 32, 5 year growth rate of 34.4% for a Price to Earnings Growth Rate Ratio (PEG) of a very low 0.93 (under 1 is very cheap, over 2 is overvalued).

Ignore the actual price of the stock (GOOG is close to $700), and pay more attention to the other measures of valuation.

YHOO (Yahoo) has a forward PE of 42.63 and a 5 year estimate growth rate of 25.4% for a PEG of 1.70.

The PEG of Yahoo (YHOO) is still under 2, but Google (GOOG) is still a great value and worth investing in.

Growth Stock Valuation (September 25, 2007)

Growth Stocks such as Apple (AAPL) and Google (GOOG) have been doing well and have recently reached their 52 week or all time highs. But when are these growth stocks overvalued?

One rule of thumb that is very useful with stocks (especially growth stocks) is to use the PEG ratio, or the Forward Price Earnings ratio divided by the 5 year estimated growth. A PEG ratio over 2 is considered overvalued, and a PEG ratio under 1 is considered very cheap.

Table of Selected Growth Stocks

Here are a few growth stocks with different PEG ratios. Data from Yahoo Finance, Tuesday, September 25, 2007:

Symbol	Stock Name	PEG	Forward PE	5 yr growth
AMX	America Movil	0.46	15.12	32.65%
HRS	Harris	0.56	15.17	27%
TDG	Transdigm Group	0.65	18.58	28.50%
HANS	Hansen	0.66	25.74	39.09%
WBD	Wimm Bill Dann	0.67	23.53	35.00%
SNDA	Shanda Interactive	0.71	20.73	29.39%
ABB	ABB	0.78	19.43	25.00%
GOOG	Google	0.87	29.13	33.65%
CROX	Crox	0.96	25.55	26.57%
RIMM	Research in Motion	1.12	34.46	30.82%
CSCO	Cisco	1.15	17.73	15.43%
JSDA	Jones Soda	1.15	42.77	37.07%
ISRG	Intuitive Surgical	1.35	54.20	40.05%
GME	Gamestop	1.40	29.10	20.75%
AAPL	Apple	1.46	34.66	23.67%
BIDU	Baidu	1.48	81.06	54.60%
GRMN	Garmin	1.56	30.15	19.38%
NVT	Navteq	1.69	39.81	23.49%
YHOO	Yahoo	1.99	48.20	24.19%
AMZN	Amazon.com	2.59	60.70	23.42%

Chart of Growth Stocks

Here's a Chart of the different growth stocks sorted by PEG. In the graph, PEG is multiplied by 20. So an adjusted PEG of 15 means PEG is 15/20 or 0.75:

The Chinese Online Gaming Boom

There's a boom in the video and computer gaming market. Gamestop (GME) the game retailer, has seen its stock soar thanks to the current video game cycle. Recently, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.pk) have released major next generation gaming consoles (Microsoft Xbox 360, Sony Playstation 3, and Nintendo Wii). Gaming software manufacturers such as Electronic Arts (ERTS) and Activision (ATVI) also benefit from this cycle. Even companies like Nvidia Corporation (NVDA), which offer programmable graphic processor technologies needed by game players, benefit.

However, the most intriguing and high growth area of this industry is the growth in online gaming, especially in China.

Online Gaming revenue in China, according to Wu Shulin, deputy Director of China's General Administration of Press and Publication (GAPP), was $1.04 Billion at the end of 2006, and is expected to grow to $3.9 Billion by 2010. The Chinese economy is booming, the middle class is growing, and internet access, especially through internet cafes is growing, trends that are helping the gaming boom in China.

According to the US based market research company International Data Corporation (IDC), there are an estimated 31 million people playing games online in China. Many people, especially those between the ages of 18 and 30, can be seen in packed internet cafes playing online games till the early hours.

There are three main Chinese companies that can benefit from this trend:

1. The9 Limited (NCTY) is a $1.3 Billion Chinese company, with a forward PE of 17.5, a five year estimated growth rate of 25%, for a Price Earnings to Growth Rate (PEG) of 0.7, very cheap (less than 1 is cheap). The company has virtually no debt.

The Company primarily engages in the development of massively multiplayer online role playing games (MMORPGs) for Chinese online game players.

The9 also has the rights to bring Western games such as Blizzard Entertainment's very popular World of Warcraft Multiplayer Online Role Playing game to China. World of Warcraft in the West is part of Pop Culture as evidenced by being prominently featured in Comedy Central's (VIA.B) "South Park" show in an Emmy nominated episode about World of Warcraft. World of Warcraft is the most popular western MMORPG in Asia and the third most popular in China with peak concurrent users numbering 688,000 and revenues of $36.1 million in late 2006.

The9 also implemented a pay-for-time system in the game, differing from the monthly subscription method in other territories.

Electronic Arts (ERTS), the US electronic software producer, will own 15% of The9. As part of the deal, The9 will gain exclusive publishing rights for EA Sports FIFA Online.

2. Shanda Interactive (SNDA) is a $2 Billion Chinese company with a forward PE of 16.84, a five year estimated growth rate of 26.9% for a PEG of 0.62, again, very cheap (PEG less than 1.0 is cheap).

Shanda Interactive engages in development and operation of online games in China including Massively Multiplayer Online Role Playing Games and Online Casual Games such as chess. Shanda maintains a large number of popular games produced by Western, Chinese, and Korean companies, with the Chinese and Korean games being the most popular.

In a recent China online gaming survey conducted by Piper Jaffray, 55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within games. Shanda also tied with competitor The9 as the company in its market that offers the best games.

3. NetEase (NTES) is a $2.04 Billion Chinese company with a forward PE of 13, a five year estimated growth rate of 15% for a PEG of 0.86. the company has a low Total Debt to Equity Ratio of only 0.217.

The company has an online games business that focuses on massively multiplayer online role playing games by selling prepaid point cards to the end user. These cards could be distributed through wholesalers, internet cafes, supermarkets and other venues.

Netease manages Fantasy Westward Journey, the most popular online game in China in terms of Peak Concurrent Users.

The company also has a wide array of internet services outside of its online games business.


Online gaming in China has a bright future. Electronic Arts (ERTS) 15% stake in Chinese online Gaming Company The9 is evidence that US companies believe in the great growth in the Chinese Online Gaming Market. Why not follow Electronic Arts lead and invest in the growth area of the gaming industry: Chinese Online Gaming.

Three International Food and Beverage Plays to Get Away from US Credit Concerns

With the United States suffering a credit crunch, people are suggesting that investors get out of financials and into consumer staples, and companies with international exposure such as Kraft (KFT) or Procter and Gamble (PG). While this is a good idea, another good play would be to play sectors which have a very low correlation to US Financials. Why not invest in international food and beverage companies which are more levered to the economy they serve?

Here are three interesting international food and beverage stocks:

1. Central European Distribution Corporation (CEDC):

CEDC is the largest vodka producer in Poland by value and produces the Absolwent, Zubrowka, Bols and Soplica brands, among others. CEDC currently exports Zubrowka to European and Asian markets. CEDC imports many of the world's leading brands to Poland, including brands such as Remy Martin, Metaxa, Jim Beam, Sauza Tequila, Grant's, E&J Gallo, Sutter Home, Torres, Penfolds and Concha y Toro wines, Corona, Foster's, and Guinness Stout beers and Evian.

CEDC is also benefitting from a strong Polish economy, growing at a good 6.4% rate in the 2nd quarter of 2007. They are even getting Russian exposure, as they recently announced their intent to acquire a significant majority interest in a Russian company which owns the number one premium vodka brand in Russia, Parliament Vodka.

This $1.65 Billion company has a Forward PE of 20.48, and a five year estimated growth rate of 17.5% for a reasonable PEG of 1.17. It is near its 52 week high and there are currently only five analysts covering the stock.


2. Wimm Bill Dann (WBD):

Wimm Bill Dann is a $4.14 Billion Russian Food company offering a range of branded dairy, juice, water and baby food products. It has a forward PE of 20.35, a five year estimated growth rate of 35% for an inexpensive PEG of 0.58 (less than 1 is very cheap).

According to the company, Wimm Bill Dann produces its dairy products in the region where they are consumed. Also, from 1999 to 2003, Wimm Bill Dann had modernized. Prior to 1999, Russia suffered a deficit in raw milk, particularly a deficit in high quality raw milk. The number of head of cattle had diminished while productivity had not grown quickly enough. So Wimm Bill Dann invested in modern Swedish milking and refrigeration equipment and later, invested in harvesting equipment. This modernization program reaped benefits greatly increasing the percentage of high quality milk.

Wimm Bill Dann also has a 20% share in the Russian Juice Market (as of 2005).

TheStreet.com's Ratings consistently rates Wimm-Bill-Dann as one of their top five fast growth stocks.


3. Ambev (ABV):

Ambev is a $43 Billion Brazilian company that produces, distributes and sells beer, carbonated soft drinks and other non-alcoholic and non-carbonated products principally in Latin America. It also bottles, sells and distributes PepsiCo International products outside of the United States. The company has a forward PE of 20.76, a five year estimated growth rate of 13%, for a reasonable PEG of 1.59. The company even has a forward yield of 1%, and only three analysts cover the stock. Institutional ownership of this stock is only 19.80%.

Ambev has an Operating Margin of 29.25%, greater than competitors such as Formento Economico Mexicano (FMX) of 13.2%.

The company Quilmes Industrial (LQU) is a subsidiary of Ambev.


Conclusion

After reading and studying the three companies, I hope that you feel like you are in another world, far away from any United States credit problem. Central European Distribution (CEDC), Wimm-Bill-Dann (WBD), and Ambev (ABV) are three great ways to get away from it all.

How to Play: Am I Diversified (Diversifying your Stock Portfolio)

In Jim Cramer's CNBC TV show, "Mad Money", Jim Cramer has a segment where callers call in and mention their top five holdings. Jim Cramer then analyzes the stocks, and determines whether or not the caller's portfolio is diversified. Many other people on the social networking site Stockpickr.com ask the same question. But is there a way to determine on your own whether your portfolio is diversified or not? Definitely!

Sector Diversification

The main focus of "Am I diversified?" focuses on sector diversification. Many companies and analysts may have some variations, but there are around ten major sectors:

1. Basic Materials: These include gold, copper, composite material, chemicals, industrial metals, mining, forestry and paper companies such as FCX (Freeport McMoran), and ATI (Allegheny Technology).
   
2. Consumer Discretionary: Consists of General Retailers, Media, Travel and Leisure, Food and Drug Retailer companies such as TGT (Target), DIS (Disney), BBY (Best Buy), and SBUX (Starbucks).
   
3. Consumer Staples: Consists of Household Goods, Beverages, Food Producers, and Tobacco. Some others (such as those at ishares.com ) would include Automobile Parts, and Leisure Goods. Examples include PEP (Pepsi), MO (Altria), PG (Procter and Gamble), and SLE (Sara-Lee)
   
4. Energy: Consists of Oil & Gas Producers, Oil Equipment and Services, Coal, and Alternative Energies (such as Solar). Stocks include XOM (Exxon-Mobil), SLB (Schlumberger), and BTU (Peabody Energy).
   
5. Financial Services: Consists of National and Regional Banks, General Financial companies, Brokerages, Exchanges, Nonlife Insurance, Real Estate, and Life Insurance Companies. Examples include WFC (Wells Fargo), GS (Goldman Sachs), NYX (New York Stock Exchange-Euronext), AMTD (Ameritrade), PGR (Progressive Corp).
   
6. Healthcare: Consists of Pharmaceutical, Biotechnology, Health Care Equipment and Services, Healthcare Insurers. Examples include PFE (Pfizer), JNJ (Johnson and Johnson), MDT (Medtronic), GILD (Gilead Biotech), UNH (United Health Group), ISRG (Intuitive Surgical)
   
7. Industrials: Consists of General Industrials, Aerospace and Defense, Support Services, Industrial Engineering, Industrial Transportation, Electronic and Electrical Equipment, Railroads, and Construction and Materials. Examples include GE (General Electric), BA (Boeing), CAT (Caterpillar), UPS (United Parcel Service), UNP (Union Pacific Corp), DE (Deere), WMI (Waste Management), FLR (Fluor Corp), MDR (McDermott), and TEX (Terex).
   
8. Technology: Consists of Hardware, Software, Semiconductor, Internet, Networking, and General Technology Companies. Examples include MSFT (Microsoft), CSCO (Cisco), GOOG (Google), AAPL (Apple), IBM (IBM), INTC (Intel), NOK (Nokia), and RIMM (Research in Motion).
   
9. Telecom: Consists of Fixed Line and Mobile Telecommunication Companies. Examples include T (AT&T) and VZ (Verizon Communications)
   
10. Utilities: Consists of Electricity, and Gas, Water and MultiUtilities. Examples include EXC (Exelon Corp), TXU (TXU Corp) and DUK (Duke Energy).
    

How to Sector Diversify

So what you can do is look at each stock in your portfolio, and categorize them into one of the sectors above. After you go through your entire portfolio, you may find that some stocks may be grouped into a single area. For example, you may hold NYX (New York Stock Exchange-Euronext) and GS (Goldman Sachs). While one is a Stock Exchange, and the other is a Broker, both are grouped in the Financial Services Sector.

There are some companies that may be difficult to pin down to any one sector. For example, AMZN (Amazon). Is it Consumer Discretionary or is it Technlogy? Use your best judgement. If you want, during your analysis, you can put 50% of Amazon under Consumer Discretionary, and 50% of Amazon under Technology.

Sector Diversification is the main form of diversification preached by Jim Cramer.

Other forms of Diversification

Sector Diversification is not the only form of diversification. There are many other forms of diversification.

Market Capitalization Diversification

Companies have different market capitalizations. Some are very large companies (large market capitalization) like GE (General Electric), while some others, are small or mid capitalization companies such as NTRI (NutriSystem). Stocks of different market capitalizations behave differently from each other.

Growth and Value Diversification

Some stocks are considered Growth Stocks. Investopedia defines a Growth Stock as one whose "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."

Some other stocks are considered Value Stocks. According to Investopedia, a Value stock is "A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio."

So within a portfolio, you can further diversify by holding different styles of stocks from growth to value.

Peter Lynch, in his Book, One Up On Wall Street, further groups stocks into six categories:

1. Slow Growers
   
2. Stalwarts
   
3. Fast Growers
   
4. Cyclicals
   
5. Turnarounds
   
6. Asset Plays
   

International and US Diversification

Another way to diversify your portfolio is to hold stocks that are based in the United States, or based internationally. With international stocks, you can further group them into Developed International Markets such as Europe, Japan, and Australia, or into the Emerging International Markets such as Taiwan, Korea, China, Brazil, India, Eastern Europe, Africa, Middle East, and Russia.

Speculative and Non-Speculative

In his books (such as "Real Money: Sane Investing in an Insane World") and his shows, Jim Cramer preaches that up to 20% of a (discretionary, not retirement) portfolio could be allocated to more speculative stocks. This is yet another form of diversification.

Conclusion

So in order to have a diverisfied portfolio, be sure to diversify across several industry sectors as mentioned above. You can also choose to diversify in other ways as well such as market capitalization, growth vs. value, speculative vs. non-speculative, US vs International Diversification.