It’s hard to catch a falling knife without a game plan, especially if you’re a bit lacking in liquidity. While waiting for a bad dip to worsen can feel like the obvious move, especially for value investors, it is a form of market timing. And timing the market in either direction, I think, isn’t exactly a formula for success unless you’re an experienced trader rather than a long-term investor.
At the end of the day, long-term value investors shouldn’t pay so much attention to the week-to-week moves, even if they’re outsized. In the grander scheme of things (think five years or so), a few sessions shouldn’t be as important as getting in if you deem a stock you see as underpriced.
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Hunting for discounts on the TSX
The way I see it, stocks that you see as going for a discount should be acted upon if you’re willing to hold for the long haul. Of course, great deals can turn into steals, especially if a market-wide panic sets in, and you’ll feel bad for not having waited for a worse drawdown. But unless you’re willing to pass on the great deal with the hope that it’ll improve, it might be worth doing a bit of buying, even if it means taking a hit right off the bat.
The fact is, you probably won’t buy the bottom in a stock with surgical precision. And even if the bottom does come into effect, you won’t know it! It’s natural to think pain begets even more pain.
In keeping things simple, I think value investors should buy if a stock’s price is comfortably below (with a comfortable but not excessive margin of safety) one’s estimate of its actual worth.
Spin Master stock seems overdue for a bounce
In any case, one such stock that looks overdue for a bounce is Spin Master (TSX:TOY), a name that only seems to know how to move lower. The stock has shed more than 67% of its value from its all-time high and seems like the perfect way to lose money, given the tremendous amount of multi-year negative momentum. With shares at fresh multi-year depths, though, and expectations that have continued to be lowered, I think the stock is getting absurdly undervalued, especially considering the strong brands underneath the hood.
Recently, the firm clocked in its latest quarter, which included the holiday season. The numbers weren’t good, with losses just north of US$184 million. Tariffs have weighed, as did the challenged consumer. And while Spin seems to be out of ideas on the way down, I like the valuation as well as the firm’s footing come a turn in consumer spending behaviour.
With inflation on food and electronics components weighing heavily, it should come as no surprise to see demand for discretionary items in a tough spot.
Either way, the 10.1 times forward price-to-earnings (P/E) multiple seems way too low for a firm that can double down on momentum in the more resilient digital games segment. In my view, TOY stock looks like a deep-value bargain that’s worth picking up, even if this isn’t yet the bottom. If you’ve got a five-year horizon, the risk/reward, in my view, looks quite good, given the low expectations bar and the iconic assets.