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Why Mattel Stock Dropped 6%

By Rich Smith – Apr 22, 2019 at 7:49PM

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Mattel stock is going down -- and this short-seller is cheering all the way.

What happened

Do moral judgments have a place in stock market investing? Maybe. Some investors simply refuse to invest in tobacco stocks, in gun stocks, in weapons manufacturers. It's not often, though, that you see an investor cite moral imperatives as an argument against investing in a toy company.

But that's just what happened today, when short seller Bronte Capital published a "short" argument against investing in Mattel (MAT -0.66%), sending shares of the toymaker down 5.8% in Monday trading.

Glowing red arrow trending down

Mattel stock is going down -- and this short-seller is cheering all the way. Image source: Getty Images.

So what

So what does Bronte Capital have against Mattel? In a word: share buybacks.

OK, that's two words. But then again, Bronte levels  two different arguments against Mattel. The first reaches back a few years to accuse Mattel of undertaking a debt-fueled "buyback binge" to support its stock price -- although these buybacks ran mainly from 2010 to 2014 and haven't resurfaced in recent years -- instead of revamping its toys business to target younger consumers.

The second argument is arguably more serious, accusing Mattel of being "a truly evil company ... that kills babies." This charge centers on a New York Times story from last week, reporting that Mattel "knew babies were dying" in its Fisher-Price Rock 'n Play sleeper sets but only recalled the device -- to the tune of 4.7 million units -- after the Consumer Product Safety Commission had officially linked 30 infant deaths to the sleeper.

Now what

Mattel is set to report its fiscal Q1 2019  earnings on Thursday. But whether its legal troubles over the Rock 'n Play hurt earnings or not, Bronte seems dead set against the company, arguing that Mattel "fails the basic test of a toy company," "doesn't love children," and sells "deadly" toys to kids.

Bronte says the company "will probably go bust" and argues that "the world will be a better place" when it does. Mattel investors today aren't sticking around to find out if that's true or not.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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