What a time it’s been for Crocs. In the past six months alone, the company’s stock price has increased by a massive 63.8%, reaching $136.78 per share. This run-up might have investors contemplating their next move.

Is there a buying opportunity in Crocs, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Crocs Will Underperform?

We’re happy investors have made money, but we’re passing on Crocs for now. Here are three reasons why there are better opportunities than CROX, plus one stock we’d rather own.

1. Weak Constant Currency Growth Points to Soft Demand

Investors interested in Consumer Discretionary - Footwear companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Crocs’s control and are not indicative of underlying demand.

Over the last two years, Crocs’s constant currency revenue averaged 1.3% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Crocs’s operating margin has been trending up over the last 12 months and averaged 13.5% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports inadequate profitability for a consumer discretionary business.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

Unfortunately, Crocs’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Crocs, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 9.3× forward P/E (or $136.78 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.

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