You may remember my previous article on Spin Master Corp. (TSX:TOY) when the stock was trading near the $36 level. I warned investors that there could be a mild correction due to the overvaluation of the stock combined with a large amount of negative press that was released regarding malfunctioning Hatchimals toys. I said that the stock could hit $30 level in the short term, and this is indeed where the stock is right now.
Shares of Spin Master plummeted 2.73% last week on news that an analyst from Comark lowered their EPS estimate for the fiscal year 2016. The stock now looks attractively priced, but is it worth buying shares on weakness?
Class-action lawsuit claims Spin Master pulled a “bait-and-switch” scheme
Many investors dumped their shares on the news that an angry parent filed a class-action lawsuit over a Hatchimal that wouldn’t hatch. I do not believe this case will win because the company had nothing to gain from such a scheme. Spin Master would actually lose a lot of money by pulling such a scheme, so I do not think the lawsuit is anything to worry about. It’s an opportunity for long-term investors to get a piece of this incredible growth name.
The aftermath of the Hatchimal won’t hatch complaints
Spin Master promptly responded to Hatchimal complaints with an apology on its website as well as through social media outlets. There were instructional videos posted, and the company doubled its customer service staff in a day.
Plenty of defective Hatchimals ended up being replaced in the process, and this will impact the company’s short-term results. But over the long term, we’ll look back on this dip as a huge buying opportunity on temporary weakness.
Takeaway
Spin Master needs to improve its manufacturing operations, but the fact of the matter is that defects happen. And, unfortunately for Spin Master, physical toys with a digital application are more prone to malfunctions than your typical low-tech toys. I believe the management team will eventually turn things around, and the company’s terrific vision will drive long-term earnings growth for shareholders.
Sometimes it pays off to take a step back and look at the big picture. All of this negative press is focused on the short term and has caused the stock to be extremely oversold. If you’re a contrarian investor, I would scoop up shares today and on any further dips because the stock still has its best days ahead of it. The stock currently trades at a forward price-to-earnings multiple of 15.6, which is an absolute steal for a company that is growing so fast.
As the brilliant investor Warren Buffett used to say, “…be fearful when others are greedy, and greedy when others are fearful.”
