Up—or Down?—InvestorPlace Believes That Tough “Structural Challenges” Facing Hasbro Explain Why Investors Should “Fade” (i.e. SELL) Despite the Company’s Recent Stock Market Rally

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What the heck is going on?— A wary stock market continues to keep a cautious eye on economic and societal events currently plaguing both Hasbro and Mattel. (Photo: phillipcfd)

It’s a Secret No Longer—There’s a Terrible Truth Facing Today’s Toymakers

Here at The Joe Report, we like to keep an eye on the the economic health of the major players in the toy industry. While reading an article about stock market investment re Hasbro, the term “fade” was used. That left us a tad confused. Fade? Beyond the obvious definitions, what did they mean? We looked up “fade” over on the investopedia website and discovered the following:

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“Fade refers to a contrarian investment strategy used to trade against the prevailing trend. A trader who ‘fades’ would sell when a price is rising and buy when it’s falling.” 

Ah. Okay. So the article is encouraging investors to be somewhat “contrarian” when considering investment in the “big H.” That’s understandable in today’s “contrarian” world. In fact, the July 24, 2018 article written by Luke Lango and published recently on the InvestorPlace website proved to be rife with additional quotes of interest for both GIjOE fans and Hasbro followers in general. Here are just a few that stood out to us (edited for length):

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Luke Lango, L&F Capital Management, LLC and InvestorPlace contributor (Photo: Luke Lango)

“Surprise, surprise! Toy maker Hasbro (NASDAQ:HAS), one of the companies that was supposed to be crippled by the recent Toys R’ Us liquidation, reported much better than expected second quarter numbers. Revenues weren’t down all that much. Margin compression wasn’t that bad. And profit erosion wasn’t as awful as everyone feared for Hasbro stock. In response to those better than expected numbers, Hasbro stock is up more than 10% to above $105. But I think this is a rally investors would be wise to fade. At $105, the valuation simply doesn’t make sense for Hasbro. Revenues are in retreat. Margins are falling back. There are secular headwinds facing the toy industry outside of Toys R Us. As such, I think Hasbro is way overvalued here, and will inevitably fall as investor enthusiasm fades.”

So… it appears Hasbro is doing just fine–for now. That’s great news. But after the “investor enthusiasm fades,” Lango states he believes the big H’s stock value will FALL. Why should that be the case? Well, apparently, it’s due to something we’ve long discussed here on The Joe Report—the dwindling interest today’s children have in toys—DUE to the growing infiltration of electronic devices such as cell phones, home computers and video gaming systems. Lango clearly concurs:

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“The Toys R Us bankruptcy and liquidation was supposed to kill this company. Indeed, it did kill Hasbro in the first quarter of 2018. Revenues dropped 16% year-over-year, led by a 19% decline in the U.S. and Canada business and a 17% decline in the international business. But, the numbers got a lot better in the second quarter. Overall, that is a positive development in the Hasbro growth narrative. The problem is that Hasbro stock is already priced for this positive development, and a whole bunch more. 

At the core, Hasbro’s issue isn’t the Toys R Us liquidation. It is a boom in internet and smart device usage among children. The average age for a child getting their first smartphone is now 10.3 years, so that means that all those 10-year-olds that were playing with Hasbro action figures are now playing on their smartphones.”

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Too young? This toddler is clearly engrossed in this—or is it HIS(?)—new cellphone. Will toys ever again appeal to future generations? Or has that appeal already been LOST—forever? (Photo: mercury news)

The very real dangers posed by cell phone addiction, unrestricted access to the internet and excessive video gaming are all well known. For children, those influences can also mean an abrupt end to what HAD been considered a traditional (or “normal”) childhood development. Surrounded by electronic distractions, their lost or waning interest in traditional, imagination-based play—and toys—is practically a given. Lango confirms this bad news with some more startling statistics:

“Plus, tablet usage among children has soared from 26% to 55% over the past several years, while internet usage has soared from 42% to 64%. In other words, children aren’t playing with Hasbro toys as much as they used to. Instead, they are playing on smart tablets and smartphones.

<Sigh.> The troubles facing the toy industry appear to be just as we feared. So how does Lango see these sad developments affecting Hasbro in the future? He closes with:

This trend won’t slow any time soon. Indeed, things may only get WORSE for Hasbro as technology continues to grow in popularity. Hasbro’s second quarter numbers were much better than expected…But, that doesn’t mean it is time to buy Hasbro stock. The company has structural challenges due to waning toy demand as a result of growing smart device adoption. So long as these structural challenges remain, Hasbro will have trouble holding onto gains.” —Luke Lango, InvestorPlace Contributor

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Q: Who needs toys? A: Fewer and fewer children, apparently. Whenever an iPad or other such high-tech device is placed into the hands of a young child, oftentimes that moment marks the END of what was previously regarded to as a “normal,” or pre-digital childhood development. The resulting “ripple effects” are still being studied and understood, but stock markets are clearly paying attention. (Photo: herald.ie)

Bottom Line: It’s a tough toy-world out there nowadays. Human society—and our children—are changing. Is this a good thing? A bad thing? Or just par for the course of life? Strongly affected by such unpredictable developments, toymakers are clearly heading into some serious economic—as Lango calls them—”headwinds.” Keep your fingers crossed that they’re able to adapt and thrive in such an uncertain business climate. Let’s hope too, that innocence and childhood isn’t eroded or shortened any further. When I was growing up in the 1960s-’70s, I remained blissfully ignorant of the “trials and tribulations of adulthood” until about age 16. Now it’s 10? Where are we headed?

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2 thoughts on “Up—or Down?—InvestorPlace Believes That Tough “Structural Challenges” Facing Hasbro Explain Why Investors Should “Fade” (i.e. SELL) Despite the Company’s Recent Stock Market Rally

  1. kneonknight says:

    I think Mattel and other manufacturers have more or less painted themselves into a corner by relying too heavily on licensed merchandise from film and television. Let’s face it, if all you have to do is copy characters and items from someone else’s imagination, it doesn’t leave a lot of room for innovation.

    Yes, the proliferation of electronic entertainment has made a dent in toy sales, but in all fairness, the toys available aren’t really offering much in the way of competition – how many versions of Luke Skywalker do you really need? How often can you rehash Beauty and the Beast or The Little Mermaid before you completely lose interest? And how often is a parent going to shell out hard-earned cash for something that will be forgotten in just a few days?

    On that subject, I also have to put some of the blame on parents who lazily pass off the entertainment of their kids to an electronic device rather than spending time with them building pillow forts or having water fights in the back yard. I am by no means the perfect father, but I do know that my daughter will gladly clear her calendar to spend time with me on a project, playing Frisbee, or just goofing off with our favorite beverage and a stack of comic books. I have never once heard her say she was bored, and her favorite things to do are acting out adventures with our G.I. Joes or anything else where we can both get involved and create something together.

    I know that I will not ever have to say I regretted not spending time with my kid when I had the chance; and I will never have to apologize for letting computers and TV turn her into a couch potato.

    So, if toy manufacturers are going to survive, they are going to have to encourage parents to turn of the various idiot boxes and spend some time with their kids, and convince kids that adventures, stories and things you create are vastly better than any on the rails game.

    How? I don’t know. Maybe they could get some of their high-paid marketing people to come up with some ideas, rather than trying to nail down the rights to the latest bland movie.

    • Mark Otnes says:

      In response to your first question, you’ll need the Luke with optional light-saber. Then, the Luke with the wrong hair-color. The Luke with an R2D2. The Luke in all 3 packaging variations. The Luke with… It does get ridiculous fast, doesn’t it? HA 😉

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