MENU

1 Underrated Growth Gem That Passes the Warren Buffett Test

It can be difficult to find growth at a discount, especially on the TSX, since it’s saturated with energy and mining stocks. You may be tempted to look at high-flying tech stocks south of the border, but that’s probably not your best move since the foreign exchange game will likely be working against you. There are a lot of golden opportunities on the TSX, but you’ve got to be willing to do some digging. But when you’ve dug up a gem, make sure you hang on to it for the long term because the long-term upside could be gigantic.

I’ve done some digging lately, and I believe I’ve found an incredible, underrated small-cap stock that passes the “Warren Buffett test.”

I consider myself a Buffettarian investor, meaning I invest according to the principals and teachings of Warren Buffett. What exactly is the Warren Buffett test? I make stock selections based on the metrics that Warren Buffett would look at when attempting to determine if a business is wonderful. If it is, and if it’s trading at a discount to its intrinsic value, then it’s usually a signal to scoop up shares with the intention of holding them for the long run.

What is a wonderful business?

A wonderful business, according to the lessons taught by Warren Buffett, is a fairly predictable business that has the ability to grow earnings by a substantial amount over the next decade. The business should have the concept of a moat, which keeps competitors from stealing market share. The business should also have a terrific management team that knows the ins and the outs of the industry it’s in.

But once you’ve found a wonderful business, you need to see if it’s trading at a reasonable price. You can have the best business in the world, but if it’s not trading at a reasonable price, then your returns are likely to be mediocre.

How do you know when a stock is reasonable priced?

A stock is reasonably priced if there’s a margin of safety — a price that’s significantly below the company’s intrinsic value — involved at the price of entry. A larger margin of safety means less downside risk, which I believe is just as important as upside potential. Warren Buffett likes his stocks to have a margin of safety, and so do Buffettarian investors.

One stock that I believe passes the Warren Buffett test with flying colours is Spin Master Corp. (TSX:TOY). It’s a small company just shy of a $1 billion market cap, and it designs, develops, manufactures, and markets entertainment products targeted at children.

The company has a very impressive portfolio of brands, including Hatchimals, PAW Patrol, and Air Hogs. The company also has many Toy of the Year awards, and I believe these brands act as a moat for the company.

The management team has an amazing vision, and I believe the company will soar over the next few years as investors realize the true potential of the stock.

It’s trading at a 29.6 price-to-earnings multiple, which I believe is cheap considering the huge growth prospects. If you’re looking for a growth stock with great fundamentals, then look no further than Spin Master Corp.

Canada's answer to Amazon.com

You've probably never even heard of this up-and-coming e-commerce powerhouse headquartered in Eastern Ontario...

But, despite coming public just last year, it's already helping the likes of Budweiser... Tesla... Subway... and Red Bull move $9.9 BILLION (and counting) worth of goods online each year.

And now it's caught the eye of the legendary investor who got behind Amazon.com in 1997 -- just before it shot up over 23,000% and made investors like you and me rich beyond their wildest dreams.

Click here to discover why this investor says it's time to buy.

Fool contributor Joey Frenette owns shares of Spin Master Corp.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.