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.
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Fool contributor Joey Frenette owns shares of Spin Master Corp.