Crox and Anchoring

The popular maker of Crocs took it on the chin and dropped 36% yesterday after announcing that next year's top line revenue estimate wouldn't be increased as has been the usual. This company has had a phenomenal run over its short life since being public and has quadrupled in price!

http://online.wsj.com/article/SB119395987580779823.html?mod=googlenews_wsj

It has grown revenue from $24,000 in 2002 to $830 mil this year!

So here's my beef with valuing growth companies: if the value is just the sum of all future earnings discounted to present value -but those future earnings are growing at some unclear but very high rate you end up with a nebulous but high valuation presently. Its growing quickly so you pay more for that growth. Well how much more do you pay? It doesn't matter too much what you pay because its going to grow for a number of years at some very high rate. There is no anchor to any metric like earnings or revenue because it's all about the estimates of the future.

So in the case of Crox, you would have had a very nice return over the last 18 months if you could have forseen the story, even with yesterday's large drop. Why was there such a large drop? The article says that their projected revenue and earnings growth for next year will be only 35-40%. Good by many measures but when you're expecting hyper-growth and only deliver good growth, the price resets to some unclear valuation.

With cyclical and stodgy industries like TransCanada Pipelines for example, there is a more defined metric of value be it P/B or P/E, or yield. Obviously it is in a slow growing industry but you knew when its PE was at 20 it was getting lofty and at under 10 it was getting cheap and hence there is some anchor for that elusive valuation. You can guarantee that TRP wouldn't have dropped 36% in one trading day. That to me is risk.

On the other hand 300% over 18 months, now that's gravy! So is LLL up to the challenge? Can management navigate analysts expectations of future growth rates and make this thing take off like a rocket?