From the end of February to mid-March, the shares of many companies plummeted in a stock market crash. Canadian toy manufacturer Spin Master Corp. (TSX:TOY) was no exception. Spin Master’s shares fell more than 50% during this period. A two-week decline like this is symptomatic of an incredible sentiment shift toward pessimism. It also signals the likelihood of a recession this year.
Spin Master’s challenges
Spin Master is in the consumer discretionary goods industry. This industry is very sensitive to the possibility of a recession hitting in the near term. One reason for this is that the company produces products that are very clearly “wants” and not “needs.” The company’s consumer base could stop making such discretionary purchases in a negative employment shock environment, such as the one that occurred in 2008.
Also, Spin Master investors are making a bet on the company’s ability to continue to innovate over the long term. Spin Master creates new, top-selling toys each and every year. This, in and of itself, is quite a feat.
In some ways, the consumer discretionary space, and children’s toys in particular, faces many of the same challenges as fashion retail. Both industries create products that need to meet the changing tastes of a very specific target market. They have a relatively short window to sell those products. Also, they need to produce an optimal quantity so as to maximize profit each year. These are all very difficult tasks.
A positive outlook
I have been bullish on Spin Master’s ability to meet the challenges outlined above. I believe Spin Master will remain a global player in this space, and I haven’t changed in my bullish outlook. However, I have been wary of the company’s relatively high valuation.
Now, though, Spin Master’s high valuation has been cut in half. This looks very attractive to me from a long-term perspective, even if Q4 2020 turns out to be a disaster. It looks to me like the risks of an impending recession are being priced in by the market right now.
Here is my advice to long-term investors considering growth plays like Spin Master. Pick a valuation level at which investing makes sense to you, and jump in at that point. My personal take at this point is that Spin Master is far too cheap to ignore. This is despite near-term headwinds and concerns I believe to be both real and problematic in terms of revenue and profitability.
Bottom line
I see Spin Master as a long-term growth play with lots of upside. The company has a solid reputation for producing big hits such as Hatchimals, PAW Patrol, and Air Hogs. Other positive factors include possible growth opportunities and an international expansion into Europe. I think Spin Master has a lot of long-term upside potential.
However, it’s important to say that in this investing environment, we’re seeing lots of babies being thrown out with the bathwater. A number of high-quality companies like Spin Master are entering oversold territory, to a degree I honestly did not see coming. I would encourage nibbling here. More downside could certainly be on the horizon as we continue into bear market territory.
Stay Foolish, my friends.
