Speaking Of Trendy Companies…

Yesterday I outlined how to properly characterize trendy aka “sexy” companies. But how does one actually invest in them?
I have long operated under the mindset that Heelys and Segway—companies whose faddish products save us from the dreaded act of walking—were both doomed.

Heelys has had a somewhat rocky journey, losing almost half of its value around a year ago, thanks to a lowered earnings forecast (followed by a string of lawsuits).

Segway hasn’t stumbled yet, its success relying on adoption of the gadgets by police squads. But the company faces an uphill battle if it intends to win over consumers in a tightening economy. Likewise, Toyota recently revealed a (slower) competitor called Winglet. Segway has fuel efficiency going for it, at least.

But this week I’m stymied that both companies reported triumphs: Heelys’s stock shot up 13% after Sketchers made public an offer to buy the company for $142.8 million. (Best headline award: “Sketchers + Heely’s = Sketchy?” from the Money Times of India.)

Likewise, Segway is on its way to raise yet another round of venture funding, as reported by Connie. The company has raised more than $175 million in venture backing.

I am confused here. The products offered by each of these companies are silly looking, very trendy and somewhat impractical (try driving a $6000 scooter to work), yet they’ve succeeded in convincing smart business people that their companies are solid enough to invest in.

For some reason, these companies remind me of another exciting entrepreneurial company built on a fast-growing trend: Crocs Inc. The company’s stock hit $68.78 a share in October of last year, its market cap in the billions. Since then the product’s popularity with consumers has declined, and the stock’s popularity with investors followed suit. Today CROX closed on $4.67 a share with a market cap of $388 million.

Aside from those tales of trendy investment missteps (get it, steps?), one trendy private equity investment sticks out in my mind. It’s Parthenon Capital and Goldman Sach’s ill-fated investment in Atkins Nutritionals, the company associated with the briefly popular no-carb diet of the same name. Facing a swift backlash, Atkins filed for bankruptcy. Parthenon and Goldman lost their $500 million investment.

In October, the company was snapped up by another private equity firm, North Castle Partners. In North Castle’s favor, the firm may be onto something. Recent studies highlight the diet’s effectiveness. And that’s the one good thing about trends—they’re cyclical. Sounds like the perfect time for a revival!