Want powerful price appreciation within the next 12 months? Both stocks of Spin Master (TSX:TOY) and Trip.com Group (NASDAQ:TCOM), which just changed its name and ticker from Ctrip.Com International (NASDAQ:CTRP) this month to reflect that it’s an international business versus one that’s focused on China, have a probable chance of doing so.
Spin Master toys win a special place in children’s hearts
If there were only one toy company that would succeed, it’d be Spin Master. It has had the highest return on equity and profit margin when compared to larger peers Mattel (NASDAQ:MAT) and Hasbro (NASDAQ:HAS).
Spin Master is innovative. Across six research and development (R&D) centres, it has a deep internal talent pool that comes up with new ideas. It also has about 200-300 third-party inventors who complement its internal R&D. This results in thousands of ideas being filtered down to 30-50 that will be commercialized every year.
It’s no wonder that, since 2000, Spin Master has received 103 Toy of The Year (TOTY) nominations with 30 wins across a range of product categories, including 13 TOTY nominations for Innovative Toy of the Year.
Spin Master’s latest novelty, which was launched in early October, is Owleez™, the first ever interactive toy pet that kids can teach how to fly. This new toy, along with five others from Spin Master, are on Walmart’s (NYSE:WMT) Top Rated By Kids list.
Spin Master is more than a toy maker
Moreover, Spin Master is more than a toy maker. To date, it has produced nine television series, including the relaunched Bakugan: Battle Planet and current hit PAW Patrol, which is broadcast in more than 160 countries and territories globally. The company is also involved with app development, after making strategic acquisitions in Toca Boca and Sago Mini in 2016.
The stock trades at a good value
At about CAD$35 per share, Spin Master trades at about 17 times earnings, which is a good valuation. The stock is partly weighed down by the concerns about the trade war and the fact that toys are discretionary spending. However, there could be a holiday season rally on the stock as early as late November.
Spin Master’s 12-month upside potential
Currently, across nine analysts, the average 12-month price target on the stock is US$36.40 (or ~CAD$47.30) per share, which represents 35% near-term upside potential.
Whoops, Trip.com must have tripped
Since its high in April, the stock has fallen by more than 30%, and the stock has gone essentially nowhere in the last 12 months. It’s an understatement to say that the stock is volatile.
Seeing the fundamental analysis graph below, investors can easily observe that its earnings and stock price can be quite volatile. However, that precisely makes it a good stock to buy at a low and sell at a high.
Trip.com is a leading travel service provider of accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. Simply put, it’s the largest travel company in China.
CEO Jane Sun stated in the Q2 earnings call that international revenue could be 40-50% percent of Ctrip’s total revenue in the next 3-5 years, up from 35% in Q2.
Trip.com will continue to experience good growth in China. “At the same time, China has become the largest source market for international travel. Taking advantage of this, Ctrip has built a comprehensive and extensive product network and developed global service capabilities to serve outbound travelers. We will leverage our existing products, services and technologies to serve travelers outside of Mainland China, especially in the Asia Pacific region. In the long run, this will enhance our scalability, reduce seasonality and diversify our potential risk from geo uncertainties.” (Source: Q2 2019 earnings call, p3)
Why TCOM stock fell
The reason the stock has been weak lately is due to Baidu (NASDAQ:BIDU) selling about US$1 billion worth of the stock. There’s no dilution of TCOM stock from this event, but the amount is about 7.4% of Trip.com’s float. The forces of supply and demand dominate the market, and Baidu’s sale creates a massive influx of supply of TCOM shares in the short run.
Trip.com’s 12-month upside potential
Currently, across 30 analysts, the average 12-month price target on the stock is CNY296 (or ~US$41.44) per share, which represents 34% near-term upside potential.
I think both stocks have a good chance of delivering strong price appreciation within the next 12 months. In fact, they are likely to benefit from the upcoming holiday season. In any case, the stocks appear to be undervalued for near-term upside of more than 30%.
That said, I’d place both stocks in the categories of medium risk due to their unpredictability and volatility.
For Canadians, I believe the best places to hold stocks for capital appreciation are in a TFSA or non-registered account.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we’re long TOY and TCOM.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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