Like the Chinese symbol for crisis, each investment holds both opportunity and danger. Seeking to maximize our profits, is there an opportunity for us in the lead-tainted toys crisis? Can we avoid the dangers?
Shares in toy maker RC2 (Nasdaq: RCRC ) have fallen 25% since the toy recalls began in earnest at the beginning of the summer. Initially the fallout was minimal, but when the toy maker scaled back earnings guidance as a result of the impact on sales, the stock plunged.
Other toy makers like Mattel (NYSE: MAT ) and Hasbro (NYSE: HAS ) have also seen their stocks take a hit, particularly Mattel, the subject of threemassive recalls. Like many stocks the companies have enjoyed a bounce since the Fed cut interest rates, but we may see shares cut again when their earnings are announced. And if this December delivers a lump of coal to investors' stockings, they may fall further.
If there is opportunity in toy maker stocks these days, there is also danger. Where else can investors turn in this crisis?
The lead paint that decorated the recalled toys is a toxic chemical that has been banned here in the U.S. for decades. Not so in China, where it took the threat of dishonor on its good name as an international trading partner for the country to ban lead in its paint.
It's in this ban we can find our opportunity.
The benefits of lead paint are that it adheres well to surfaces, resists cracking, and makes colors more vibrant. If it wasn't for that sticky problem about being poisonous, we wouldn't be reading about toy recalls. Lead poisoning impairs development of the brain and central nervous system, and at high levels can be deadly if ingested. Children are known to nosh on a toy now and then, and parents need to be certain that the toys their kids play with are lead-free.
An alternative to lead is titanium dioxide. Found in surfeit amounts in the soil, titanium dioxide -- or TiO2 -- is the most widely used white pigment because of its brightness. When mixing paints it is in the base paint for all pigments, and it is actually considered safe enough to use as food coloring and in toothpaste. The world's largest manufacturer of titanium dioxide is DuPont (NYSE: DD ) .
According to the company, global demand for titanium dioxide white pigment was strong in 2006 with volumes rising about 5% from the year before. The coatings and color technologies segment contributed $6.3 billion, or 23% of DuPont's annual revenue last year. The company expects both the Asia Pacific region and Latin America to be its prime growth markets, although total segment sales were expected to moderate to about 2% growth. That was before the recalls, however, and before China banned lead in its paint.
A good portion of DuPont's segment relies on car makers' sluggish sales, which could serve as a drag. Yet DuPont could stand to benefit from Chinese toy makers needing a ready source of titanium dioxide. Kronos Worldwide (NYSE: KRO ) -- owned largely by Valhi (NYSE: VHI ) and NL Industries (NYSE: NL ) -- is the number two TiO2 maker, with 90% of its revenues derived from the pigment.
With every investment there are dangers. How investors approach opportunities allows them to find the silver linings.
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