Left Brain Thinking Podcast: What is at the top of our JARVIS list?

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high yield bonds with the potential for dramatic price appreciation. Today, we're gonna be talking about a stock that has been atop the firm's proprietary Jarvis system for the last 6 weeks, and that Brian Dress, Director of Investment Research at Left Brain Investment Research, wants to put onto your radar. To get more details on the stocks we discuss here on Left Brain Thinking, go to leftbrainir.com. And to learn more about how the methodology has been wrapped into Left Brain's new mutual fund, go to leftbrainfunds.com. Brian Dress, great to chat with you again.

Great to be back with you and the Left Brain Thinkers, Chuck.

I'm excited about this one because as we were talking, setting things up, what you told me is this is a stock that would not be on your radar screen if Jarvis the system didn't pick it up for you. So explain, A, the stock, and B, why Jarvis loves it now, but also what Jarvis saw that you wouldn't have seen.

So Chuck, the stock we're talking about is Crocs, ticker CROX. That's kind of a household name. A lot of us know about the clog they sell in the marketplace. We don't usually look at retail stocks generally. We're suspicious sometimes, wondering is a trend going to become, you know, a secular growth story. The reason we have Jarvis is we feed all of our fundamental inputs into Jarvis and Jarvis just gives us back what we put in. And this stock has been in the top performing list, which means it has to be in the top 50 of Jarvis rankings for the last 6 weeks. And it's number 1 ranked stock in Jarvis. So this is exactly why we have Jarvis, because there are a lot of stocks like this that might slip through the cracks if we didn't have Jarvis. Some sort of securities evaluation application to help us look through our criteria.

In other words, this is the part of left-brain thinking that overcomes the human side of the brain where it's like, hey, I've got a bias towards— I don't love retailers, or I've got a bias towards whatever, or I don't like the shoes, which when it's Crocs, some people love them, some people— no, not exactly. Either way, whatever your bias is, the idea here is we're not looking for a company that we love. We're looking for a company that Jarvis loves.

Yeah, it's exactly right. You know, it's just helping us in our process because as we always say, we follow about 1,000 stocks and there's nobody in this world that can follow 1,000 stocks closely. And so it's helpful to have some automated help to put us onto stocks that, as we said before, we wouldn't necessarily look toward. Our normal process.

What are the things that Crocs has going for it that Jarvis particularly likes?

It's just kind of like what we always talk about, you know, we talk about 4 or 5 criteria we look at for any stock. The number one is always acceleration of revenue growth. In the last quarter, Crocs reported 93% sales growth year over year for Q2. In the quarter before that, it was 64%. The quarter before that was 57%. So there's clearly a trajectory underway here. Margins are also up from 46% in 2016 to 58% in the most recent quarter. And actually, the last quarter they had about $650 million in sales and about $325 million in earnings, so almost 50% net earnings yield. So the numbers all look really good for Crocs, an acceleration in both revenue and in profitability.

Now, it's important to know that because you're using Jarvis as your backstop here to make sure that you're finding this kind of an opportunity that if these trends change, which could happen in a quarter, you might not be long for this stock. It's your favorite now, but if I were to ask you what Jarvis's favorite is in a couple of weeks, Jarvis could have fallen in love with something else, right?

Yeah, completely right. You know, Jarvis is our starting point in our research process, and then we'll do a deep dive when we see an idea identified by Jarvis. And so, you know, we like founder CEOs. There's not a founder CEO here, but CEO Andrew Rees, he came in around 2017 to the CEO spot. And ever since then, the sales growth trajectory has turned, profitability has become better. So we start doing this deep dive research and see what really is driving the numbers. And that gets us a little bit more comfortable with what's going on. But I will caution and say we are still skeptical about this name just because retail trends being what they are, We're not 100% convinced this is going to become a secular growth story, but it's on our radar. It's something we're watching. This company is only $8.5 billion market cap right now, so there's definitely a lot of upside here if the trends continue.

So at what point do Jarvis and the analyst butt heads? I mean, you say you're watching it, so it's not something— even though it's been on top of Jarvis, it's still being looked at and it's not something you're buying, or You're buying it against that backdrop of, okay, I'm a little worried here. And knowing that at some point if the retail situation changes, even if Jarvis still loves it, you're out. How do you resolve those conflicts?

Yeah, it's more the latter. Yeah, we're starting to dip our toe in Crocs, but again, we're not gonna be jumping in with both feet like we would, you know, a company that's in our normal wheelhouse of a SaaS cloud provider or something like that. You know, we'll just keep watching the numbers. We watch every quarter. Every quarter comes out with an earnings report. We're going to take a look at that earnings report. We're going to see if those trends change. And Jarvis will definitely adjust as well. If the acceleration of revenue growth ends, that will be reflected in the numbers. But we're always looking both at the qualitative and the quantitative factors in any name that we follow. But it is really interesting story here. Just on the qualitative side, we're seeing that this new management has been very aggressive getting Crocs into storefronts. My colleague Freddie Garcia told me he was out shopping with his daughters the other day and saw multiple Crocs displays, huge displays in multiple stores. And they're working with influencers. I don't think you've ever talked about these people on your show, Post Malone, Nicki Minaj, and Justin Bieber. So, you know, the brand is gaining relevance and it's because of an aggressive management. And that's something that we really like to see. If those trends change, both quantitative and qualitative, we might change our view on things. But for now, we would consider this a very interesting story. We're still somewhat skeptical, but we're definitely starting to dip a toe.

From the perspective of having trust in the system, as you point out, your inclination would be, I wouldn't be going there. Jarvis is telling you, go there. We know that you depend on Jarvis to an extent, but here we are in that, that gray area. How often do you look back the way Many investors would look back and go, man, I wish I had bought this. You know, when I first thought I should own whatever, when I first saw this company at the mall, or I first did whatever, everybody has that story of something that got away. Do you guys tend to find that like, hey, when we don't pay attention to Jarvis, that's when we go, man, I wish I had listened to Jarvis.

It happens. It definitely happens. You know, one theme we were talking about earlier this year was the inflation story and commodities and things of that nature. And we were skeptical of that. We didn't really jump in too aggressively in commodities and, you know, didn't work out. We missed out. That's okay. There's always opportunities coming along. The reason we have Jarvis, again, it's a starting point. We want to be comfortable from the quantitative, the numbers point of view, and we also want to be comfortable with the story. So sometimes we'll miss a good trade or a good investment, but we know there will always be another one coming down the pike. So it's important to control your emotions as an investor, and part of that is letting go when you miss out on an opportunity. And that's something that we try to do in-house. And that's something we try to preach to our clients that work with us as well. So again, you may miss out once in a while, but that next opportunity is coming down the pike.

And right now you're trying to make sure that you don't miss out. It's why you're looking at and dipping your toe into Crocs. Brian, great story. Thanks so much for joining me to talk about it.

Great to be here, Chuck. Thanks as always.

Left Brain Thinking is a joint production of Left Brain Investment Research and MoneyLife with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com or on your favorite podcast app. Thanks to my guest, Brian Dress, director of research at Left Brain Investment Research. Learn more about the firm at leftbrainir.com. Learn about its new mutual funds. At leftbrainfunds.com and on Twitter at Left Brain IR. Left Brain Thinking is available every other Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every other week. And until next time, stay safe everybody and happy investing.