Monday, April 14, 2008

Holy (Holey?) Crocs (CROX) !!

Ouch. The mine field that is earnings season took out another - Crocs (CROX) has put out a horrendous warning; going from .45 EPS to 0.00 to -0.05 in the first quarter. Yikes.
  • "Retailers in general are planning more cautiously, and therefore, we did not experience the level of at once business we originally expected," he said. "In addition, because of our current expense structure, a shortfall in sales versus our expectations disproportionately impacts our earnings results."
I point this one out because we used to own the name - I sold it back in January in the $30s (at a loss) even though it looked "cheap" - the chart was just not telegraphing good things. Then I revisited the name about a month and a half ago as the stock was roughly $19; it looked even cheaper but the chart was still a disaster [Mar 5: Revisiting Crocs (CROX)] I wrote:

I came upon Crocs (CROX) which when we last discussed [Jan 18: Closing Crocs], I was selling for a sizeable loss in the mid $30s. I looked again today, and had to avert my eyes from the carnage. It now trades at $19. Or 7x 2008 earnings. So it has lost 50% more of its value in 6 weeks - during a time the market has been essentially range bound and in fact retail has had short spurts of Kool Aid buying.

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising] It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go. I was looking at a chart of Whole Foods (WFMI) and that's a perfect candidate - its held up "ok" because it relies on the upper middle class who can afford to pay $7.00 for organic milk. Well, when economics start to hit, people are going to have to stop being so "healthy" and buy what they can afford. That's just reality. Hence this looks like the prototypical short. As is Harley Davidson (HOG) [Jan 25: I Can't Believe this Pig...err HOG was up Today] [Sep 7: More Retail Tells? Harley Davidson and Office Depot], as is just about every restaurant in America [Sep 19: Tough Times Ahead? Restaurants] - even magical Chipotle Mexican Grill (CMG), as if just about every retailer in America ex-Walmart (WMT), etc. These stocks bounce every time the bulls pass their... well bull... that the consumer will be back any moment now and just "trust us" because in 6 months they'll be back in the malls spending like mad. Just. Plain. Wrong. These are going to be shorts for a long time. It won't be so easy as when I first called it out in early fall because we were still in the "no recession at all" camp, and the stocks had just began to weaken from much much higher levels. Now you have to short in smaller time frames, realizing dead cat bounces occur every 3-5 weeks as a "hopeful rally" will ensue. At which point, once it tuckers itself out - you short again. Keep repeating until CNBC finally tells us "we're heading into a deep, long recession" - and then you'll probably want to go long since the bottom will be in.

Simple as that. Next to go on the food chain will be entertainment - think casinos - Wynn (WYNN), Las Vegas Sands (LVS), MGM (MGM) - it is all going to suffer [Nov 1: A Top in Casino Names? Wynn and Las Vegas Sands] - that's an "extra" you don't "need". Disney (DIS) will hold up ok due to our cheap US peso bringing in foreigners but regional amusement parks without that international name recognition are going to suffer the same fate. Sorry to sound alarmist but this is the coming reality of a strapped, indebted US consumer whose real wages have been pummeled for years (this has not suddenly happened 18 months ago; it's just now catching up to us without the house ATM to hide the pain), and now is taking it on the chin with the Fed policy to devalue their currency to the tune of 1:5 ratio. Each dollar they now own becomes even more worthless.

So when you ask for specific names from me - its simple - what can you do without? What would you give up first, second, and third as your budget closes in on you? What will you sacrifice to pay for food, gasoline, heating, and air conditioning? Whatever you will skip on - short that stock each time the "early cycle" proponents run them up for a 5-7 day cycle, on wishful thinking. Even cheap holey shoes that cost half a ticket to a professional ballgame are seeing the pullback. The only people immune and the only products immune are those catering to the top 1% - Porsche yes - Ford no. 60' yacht - yes. 22' Sea Ray powerboat - no. Avoid the "no's" which frankly is almost everything facing the domestic consumer. We're heading into a long, drawn out recession... I've said it since last summer and as each month/week/quarter passes more denial will turn into acceptance and more earning cuts will have to happen across the board. The people in denial rely on government reports, which are for the most part another pile of fiction work.

Again, my blog readers and investors in general are the "well off" in this country - you need to step outside your shoes and think how the typical mom and pop guy in this country are living, the ones without the Ameritrade account, without a 401k account, who never watch CNBC, who don't know who Uncle Ben is, who work 2-3 part time service jobs to survive (or 1 full time service job that pays 20% less than the old manufacturing job they used to have), who don't have the kids playing travel soccer, or gymnastics class... and think how their spending and what they are cutting. How are they coping with a sudden 20-30% food inflation? 40% year over year gas price increases? 30% home heating? I'm not talking the bottom 10% the government helps; I'm talking the middle 50% who are left to their own devices and we used to call the Middle Class. And then assess how all the factors affecting the "investor class" (CNBC viewers, blog readers) are hitting them - at a rate far far worse. [Jan 16: Interesting Human Economic Toll Piece in NY Times] Then invest accordingly.

Long none mentioned; I'd be short many if I could in my account

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