Momentum investing can lead to powerful gains. That's why some investors suggest you should always "let your winners ride," presumably to even higher prices. This was my logic when I recommended shares of Crocs (Nasdaq: CROX) last August.
The footwear maker's stock had already surged 1,200% in just 15 months, and shares still looked reasonably valued. Since then, they've risen another 85%, now trading at about $26 a share. However, letting this winner keep riding may prove risky -- shares are valued well above the peer group and investor expectations about future operating performance are quite high.
But we live in a different reality now. After a strong two-year run for the major indexes, a cautious tone has set in and momentum investing has become an unsafe strategy. Instead, it's time to play defense and seek out names that will hold up in down markets, while still posting upside in rising markets. Looking at the peer group for Crocs, I can't help but notice the stunning valuation for rival Collective Brands (NYSE: PSS).
Through its 4,833 Payless ShoeSource stores around the globe, the company designs and sells footwear and related accessories under many widely-known brands, including Sperry Top-Sider, Stride-Rite, Keds and Airwalk. It's not a high-growth business, but it's wildly profitable and shares are quite cheap, having fallen by a third since late April. Shares now trade right at book value, which makes the stock a compelling value play.
Why the selloff? For starters, the flagship Payless stores have seen a slowdown in traffic in recent months because its lower-income demographic is still feeling the lingering effects of the recession and persistently high unemployment. Rising gas prices also affect consumer spending, since many people have to cut back in other areas of their budget to cope. So when gas spikes to $4 a gallon, footwear sales inevitably take a hit. Because of this, investors are assuming sales will remain weak for at least the next few quarters. In addition, feeling the heat of this slowdown, the company's CEO, Matthew Rubel, recently resigned.
However, the beauty of this business is in its long-term consistency. Footwear purchases can be delayed, but not avoided altogether -- shoes invariably wear out from use.