Stock Market Trends: Classic Value Trap

If a stock’s valuation seems to good to be true, it probably is. This was certainly the case with Crocs (CROX). At today’s close the stock was trading at 5.8x current-year estimates. That is pretty ridiculously cheap, especially for a company that is still growing pretty rapidly at about 21% per year. Sounds like a steal right? Wrong. After the close we got a sense of why investors were dead right to be unloading the stock.

CROX warned and said that it sees FY08 earnings of only 16 cents per share, not $1.53. Talk about a slashing! Anybody who was valuing the stock based on the old estimate wasn’t even close. Those earnings were imaginary. This is the classic “value trap” that lures in many unsuspecting investors. This is why the direction of the business and its momentum is usually more important than absolute valuations.

Here is what the company had to say:

“The domestic marketplace proved to be more challenging during the second quarter than we had originally anticipated. While we did experience solid sell-through with many of our major accounts, retailers across the board were extremely cautious with their level of reorders, choosing to operate with leaner inventories versus a year ago.”

Stick a fork in CROX…..It’s done. At least for now. It’s still halted in the aftermarket, but it will most likely be on the list of biggest losers tomorrow.

Update: CROX is trading at $4.50 in afterhours, almost down 50%.