Crocs: A No-Brainer Stock to Buy with Potential for Profits

Still growing at a healthy clip

The shoe business I'm talking about isn't Nike, Under Armour, or Adidas. It's Crocs (NASDAQ: CROX).

The maker of popular foam clogs continues to please its shareholders thanks to strong demand for its products. Revenue was up 6% year over year in Q1. The gain was driven by remarkable growth in China, where sales skyrocketed in the triple-digits. Crocs generates far less revenue in the Asian nation than it does in the U.S., so there is a sizable expansionary runway to further penetrate the world's second-biggest footwear market.

The latest financial report did give investors one reason to worry. The acquisition of HeyDude isn't quite working out as planned. This casual footwear maker, which represented 21% of total company sales in the first quarter, saw revenue decline 17%. Management is focused on stabilizing this segment, with an emphasis on fixing the distribution strategy.

But don't let that distract you from just how profitable Crocs is. It produced $226 million in Q1 operating income, translating to an impressive margin of 24%. This is a usual occurrence that has afforded management the ability to continuously repurchase outstanding shares.

Biggest question mark

The reason Crocs is able to grow its sales, as well as generate strong earnings, is because of the power of its brand. This is the single most important factor that supports the company's market position, helping differentiate it in an otherwise extremely competitive industry.

The risk that investors need to be mindful of is the possibility that the brand becomes irrelevant. It's very challenging to find lasting success in the fashion sector. This reality is what makes Nike's track record over the past few decades truly amazing, as it has been able to meet the needs of constantly changing consumer preferences.

The current CEO, Andrew Rees, has done a wonderful job of maintaining Crocs' brand image. His team deploys a unique marketing strategy that involves high-profile collaborations and partnerships that keep things exciting for consumers. The business just hired Terence Reilly, who turned Stanley Brand's drinkware into must-have products, as the EVP and President of HeyDude. He was also previously in marketing leadership positions at Crocs from 2013 to 2020.

It'll help the brand that inventory was down 18% year over year in Q1. Running a tight ship when it comes to inventory is key to avoiding excessive markdowns and promotions, which can quickly tarnish the brand.

Compelling setup for prospective investors

Crocs' financial performance over the years has been outstanding. And shareholders have been rewarded with a stock price that has climbed 511% in the past five years, beating the Nasdaq Composite index.

But with shares 21% off their peak, new investors have a rare opportunity to buy a growing and profitable business at a ridiculously cheap valuation. The current price-to-earnings ratio of 11 tells me that the market still hasn't fully bought into the Crocs story, even though the company has proved the bears wrong in recent times.

Spending $1,000 to add this stock to your portfolio seems like a no-brainer decision.