Spin Master Corp. (TSX:TOY) skyrocketed almost 11% in a single trading session Wednesday around the same time my previous piece was published. In the piece, I mentioned that the stock was severely undervalued because of short-term issues that will be forgotten down the road. When we take a step back and look at the big picture, the 22% correction will be nothing more than a blip in the stock and a huge buying opportunity for investors who seek deep value.
The company also announced that it got its Hatchimals brand patented, and that it will be releasing a new and improved glittery Hatchimals 2.0 as well as a line of low-tech collectible toys called “Colleggtables.” The stock was extremely undervalued at the $30 level, and I still believe it is a great long-term play after the 11% single-day surge.
Short-term pain for long-term gain
Nobody wants to catch a falling knife. But if the business is as wonderful as Hatchimals, and it’s trading at 15.8 forward price-to-earnings, it’s simply too good of a deal to pass on. The stock was overlooked by many investors due to “Hatchimals wouldn’t hatch” stories, but if you’re a long-term investor, you would have realized this was just a short-term issue that will mean little in the scheme of things.
I purchased shares on weakness with the expectation that they would continue to decline over the short term. I was comfortable with this, and I knew the company would eventually rebound in a big way because the fundamentals were solid and the growth prospects were exceptional. If you truly believe in a company and its management team, then you’ll be rewarded in a big way by buying shares on weakness.
As the brilliant investor Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Of course, you’ve really got to do your research and ensure that the company’s long-term fundamentals are still intact. Otherwise, you could be looking at a value trap that could destroy your wealth.
Patents approved and new products announced in the Hatchimals family
I believe Spin Master is set to rebound this year in a huge way. The company recently received approval for patents on its Hatchimals brand of toys. I believe the Hatchimals line of products will evolve into a huge earnings driver for many years to come. The brand is extremely popular with kids, and there are so many opportunities to grow it.
The company also announced that Hatchimals 2.0, featuring glittery, new creatures that will hatch from the shell, and Colleggtables, a miniature line of collectible toys that come inside small eggs you can manually break open, will be on the way.
The hopes with Hatchimals 2.0 are to distance the toy from the original Hatchimals, which experienced substantial defects. I believe the updated Hatchimals line will have a much lower defect rate than the original, and this could result in an incredible earnings boost later in the year.
The new Colleggtables miniature toys are an interesting addition to the Hatchimals brand. They’re low tech and won’t be prone to malfunctions. The price is also substantially lower, making the toy easier on parents’ wallets.
There’s a similar type of collectible called Shopkins produced by Moose Toys; it’s one of the hottest brands in the toy industry. There’s a huge market for these cute miniature figures, and it’s quite possible that Colleggtables will become a hit in the miniature collectibles scene.
Conclusion
I’m even more bullish on Spin Master after the announcement of its new products. Even after soaring 11% in a day, I still believe the stock is still a huge buying opportunity for long-term investors that want to get a wonderful growth business at a discount.
The Q4 2016 and full-year earnings results are coming out in a few weeks. My recommendation remains the same: I would buy shares now and after the results, just in case earnings are more disappointing than expected. Right now, it sounds like everyone is expecting the worst because of the issues surrounding the defective line of Hatchimals last Christmas.
Stay smart. Stay hungry. Stay Foolish.
