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Crocs’ plunge means it’s time to walk away

Sun., March 28, 2010

Plastic shoemaker Crocs (Nasdaq: CROX) recently reported modestly improved fourth-quarter results – along with news that its CEO is departing. Revenue was up 8 percent over year-ago levels, but the company still lost $11 million (which was better than last year’s loss of $35 million). That’s not nearly the heady revenue growth Crocs delivered back before its fall from trendy grace, but it’s still admirable in a rough economy.

John Duerden, who has been CEO for only about a year, deserves credit for helping the company pay down debt and lifting this battered business out of its previous precarious position. He’ll be replaced by the company’s current chief operating officer and six-year veteran, John McCarvel, but many shareholders don’t have warm and fuzzy feelings for management veterans; insiders dumped shares at their highs (remember when it traded at about $75 a share?) before the company started choking and the stock began its gut-wrenching, precipitous drops into penny-stock territory.

Investors should step away from Crocs. While the company does predict that it will break even in the current quarter, it will probably never return to the kind of growth it delivered at the height of its faddish heyday.

CEO departures are rarely ever great news. At the very least, they can distract management. And for companies trying to turn around, like Crocs, they’re especially troubling.

Ask the Fool

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My dumbest investment

Several years ago a friend told me about a company with a revolutionary treatment for farsightedness that involved heating the eye with a laser. It was noninvasive and they were getting good results. FDA approval was imminent, so I bought at $4 per share. After approval, the stock shot up to $17. My buddy assured me this was a $20 stock, so that’s where I set my sights (big mistake). Shortly after this meteoric rise, pessimists were shorting the stock and it started to fall. It turns out the orders never materialized (people shied away from frying their eyes versus cutting them open – go figure). Soon the stock wasn’t worth the paper it was printed on, a court order seized all assets of the company, and I wrote off the entire investment. – Matt McGlothlin, San Antonio

The Fool Responds: First off, never bank on FDA approval – sometimes it never comes, or it takes years. Also, companies without track records of growing sales and earnings are risky bets. Companies trading for less than $5 per share are often on shaky ground.

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