The COVID-19 outbreak and the resulting emergency measures taken by the governments around the world took a toll on stocks. While many of them recovered back sharply, a few continue to trade low, despite strong fundamentals.
Two such beaten-down TSX stocks are Spin Master (TSX:TOY) and Gildan Activewear (TSX:GIL)(NYSE:GIL), which continue to trade low but have strong growth potential. So far this year, shares of Gildan Activewear and Spin Master are down about 47% and 39%, respectively. It is the slow pickup in demand that continues to play spoilsport and stalls the pace of recovery in these TSX stocks.
With the reopening of the economy and gradual improvement in demand, both these stocks could see an increase. However, with the uncertain economic outlook and the potential threat of the second wave of the virus, it could take a couple of years for these companies to trade at their pre-pandemic levels (which is nearly double their current price levels).
Spin Master stock has risen more than 100% from its March lows. Meanwhile, it has increased by 29% since I’d recommended it on June 1. Despite the recovery, Spin Master stock is trading about 46% lower than its 52-week high of $44.43.
The unparalleled damage to the demand and supply-chain worries dragged Spin Master stock down. However, Spin Master’s strong fundamentals and diversified assets indicate that its stock could scale back to its pre-pandemic price levels, implying more nearly 100% returns. I am not suggesting a quick rally in Spin Master stock. Instead, Spin Master stock could witness gradual recovery over the next couple of years, reflecting normalization in demand and expansion of its digital and entertainment portfolio.
Spin Master’s largest customers are continuing with their purchases, and its manufacturing facilities are operating at full capacity. Meanwhile, its digital platform is witnessing sustained growth in monthly active users. Spin Master stock is also likely to gain from its entertainment franchises in the coming years.
Spin Master is net cash positive with a cash position of US$424 million and a debt of US$349.2 million as of March 31. The company remains well positioned to benefit from its diverse product and geographical base.
Shares of Gildan Activewear are down about 62% from its 52-week high of $53.34. The sharp decline in its stock followed the significant downturn in demand for its core products, primarily in the imprintables channel.
Investors should note that Gildan Activewear’s imprintables channel products are used for large gatherings, including the promotional, sporting, and cultural events. The absence of these events has led to a double-digit decline in the segment’s volumes during the last reported quarter.
The recovery in demand for its imprintables segment is likely to take time as the threat of the virus is still there. Despite the near-term challenges, Gildan Activewear’s robust business model and financial flexibility will help it in navigating the current crisis. Moreover, the reopening of the economy should further support Gildan stock. However, Gildan Activewear will take at least a couple of years to reach back to its pre-pandemic sales and price levels.