The COVID-19 pandemic has altered a lot of things from the way we live, to the way we work, to the way we shop, everything has changed. Apart from changing our way of life, the pandemic has hit businesses around the world pretty badly.
Big shifts in the global financial markets have left me stunned. I can’t remember any instance where the markets have fallen by such a degree and recovered so fast. Such situations make investing tough, especially at a time when uncertainty looms large.
The fear of huge losses ahead makes me conservative. However, the rock bottom prices of few stocks are pushing me to hit the buy button. Many stocks are down for good reasons and may not recover anytime soon. However, some stocks can bounce back strongly and present an excellent opportunity to earn big in the long run.
One such TSX stock is Spin Master (TSX:TOY). While the markets rebounded strongly in the past couple of months, shares of Spin Master haven’t participated in the recovery rally. Supply-chain disruptions and lower consumer demand led investors to dump Spin Master stock.
So far, Spin Master stock has cracked more than 50% this year. Besides, it is down about 60% from its 52-week high of $46.62.
Strong upside potential
Spin Master’s problems are transitory, which I expect to abate in the later part of the year. Further, the company’s production flow issues are mostly sorted with its key factories in China and Vietnam operating near to full capacity.
Investors should note that Spin Master’s 60% to 65% of goods are manufactured in China, which has returned to normal.
On the sales front, Walmart and Target, which together account for 40% of its global sales, have continued to purchase as they have been able to stay open. Moreover, Amazon, Spin Master’s third-largest customer, has also resumed purchases after a brief pause.
Spin Master’s diversified product mix acts as a hedge. For instance, its gross product sales increased 0.7% in the most recent quarter despite challenges. The company is witnessing strong demand in the games & puzzles and boys action and construction segment that continues to offset the weakness in other categories.
The company’s digital portfolio is another key growth catalyst for the long term. Spin Master’s Toca Boca and Sago Mini platforms are growing rapidly with a continued increase in monthly active users. Moreover, its entertainment franchises add another revenue stream.
Spin Master maintains a strong balance sheet with ample liquidity. As on March 31, Spin Master had US$424 million in cash and US$349.2 million in debt, leading to a net cash position of about US$74 million. Spin Master’s solid financial position bodes well for future growth through incremental acquisitions.
Bottom line
Investors should note that Spin Master’s top-line could stay muted in 2020. Besides, its gross margins are at risk in the near term. However, its strong product portfolio and a diversified geographical base position it well to benefit from the recovery in demand.
Moreover, the sharp decline in its stock price makes it an attractive value pick for the long term.
