Niwot-based Crocs Inc. is taking a bite out of investors betting against the trendy shoemaker.
Shares of the company soared 7.2 percent Tuesday, setting a record close of $44.25. The stock is up 110.7 percent since the company’s February initial public offering, making Crocs one of the year’s most successful IPOs.
Tuesday’s run-up was fueled by the company’s spectacular earnings report last week, which spurred many short sellers to snap up shares of the company, thus bidding the share price even higher, said Dylan Wetherill, president of ShortSqueeze.com.
“It’s a classic short squeeze,” said Wetherill, whose company gathers data on short positions.
Short sellers borrow shares of a stock, betting that the price will drop. If correct, the investors make money by repaying the borrowed shares with shares purchased at a lower price.
If they’re wrong, the short sellers are “squeezed” into buying shares to repay the loans, thereby driving the stock price up.
Wetherill said an astounding 12.4 million shares of Crocs have been sold short. That represents 51 percent of the company’s 24.2 million actively traded shares, a number called the float.
“It’s ridiculously high,” Wetherill said of the short interest, noting that anything above 15 percent is considered high.
Crocs spokeswoman Tia Mattson declined to comment on the stock price, citing company policy. Crocs, with projected 2006 sales of about $335 million, has a market capitalization of $1.7 billion.
Some investors may be betting against Crocs because fashion trends often shift quickly.
In addition, about 74 percent of the company’s sales during the year’s first six months were generated by just two models, the Beach and Cayman lines, analyst Mitchel Kummetz of Robert W. Baird & Co. wrote in an Oct. 17 research note.
“If these two styles were to fall out of favor with consumers, the company’s results would likely be adversely affected,” Kummetz wrote.
In the third quarter, the company’s reliance on those two models decreased, according to Ron Snyder, Crocs’ chief executive.
Crocs had third-quarter net income of $21.5 million, or 53 cents per share, up from $7.4 million, or 22 cents per share, a year earlier.
Short interest in Crocs could be greater than it appears because of so-called naked short sellers, said Patrick Byrne, chief executive of Salt Lake City-based online retailer Overstock.com and a vocal critic of the investment practice.
Naked short sellers don’t actually borrow the shares, which can cause an imbalance in the market for the stock that can depress the stock price in some cases.
Christopher Cox, chairman of the Securities and Exchange Commission, in a July speech called naked short selling a “serious problem” that can “drive down a company’s stock price to the detriment of all of its investors.”
Some industry experts discount the concerns raised by Byrne and others, arguing that naked short selling affects just a small swath of companies.
Since Aug. 7, Crocs has been on the so-called Reg SHO list, which cites companies targeted by naked short sellers. Since then, shares are up 67 percent.
Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.
