A small cap stock to take for a spin

So many toys. So little time. So too with small cap stocks. And why not? There are lots to choose from. Small caps represent 60 per cent of the stocks in the TSX Composite. Investment analyst Ryan Modesto picks his favourite for The MoneyLetter readers.

Small_Cap_StockThe MoneyLetter recently spoke with Ryan Modesto, the CEO of Waterloo-based 5i Research®, which has been covering small cap stocks for over five years now.

“The really interesting thing about small caps is that it is likely one of the few areas where smaller investors have an opportunity to outperform the markets. Smaller names tend to have less analyst coverage and fewer institutional investors that can ‘play’ in the space, due mainly to liquidity and size issues.

“These factors mean that in aggregate, there are fewer eyes on the small cap space, and with fewer investors turning over rocks, the more potential there is for mispricing or to uncover names that fly under the radar.”

One of Mr. Modesto’s favourite small cap stocks is Toronto-based toy company Spin Master (TSX—TOY). Founded in 1994, this consumer goods stock has grown to become a leading children’s entertainment company that creates, designs, manufactures and markets a diversified portfolio of innovative toys, games, products and entertainment properties.

Spin Master has grown organically and by acquisition. It recently bought GUND, one of the oldest and leading plush toy manufacturers in the world. Revenue for the year ended December 31, jumped 30 per cent, to $441 million.

“The founder got his start by selling toys on the street, and today they’ve got a very diversified product base. One of the interesting things about Spin Master is that a lot of their toys have a tech feature, which makes them very appealing today. The young boy who likes interactive toys and games is probably their main target.

“They’re also pursuing international growth very aggressively. In that way, Spin Master is a lot like Shopify. They’ve grown fast, but we don’t think they’ve grown too far too fast. They’ve learned how to deal with growth and balance sheet risk.

“Mattel is the biggest toy company, but Spin Master has outperformed them quite handily. Last year, Mattel was down 36 per cent, while Spin Master was up 68 percent. They have a very wide distribution network. They don’t rely one or two outlets, so they’ll never be hit by a single, big bankruptcy, like Toys ‘R’ Us.”

Mr. Modesto says Spin Master has an excellent management team. And while 5i doesn’t publish target stock prices, they really like TOY’s long-term growth prospects.

Ryan Modesto, CFA, is CEO at 5i Research®, an investment advisory service based in Waterloo, Ontario. He can be reached at www.5iresearch.ca. 

This is an edited version of an article that was originally published for subscribers in the March 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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