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No. of Recommendations: 4
One thing that has always confused/frustrated me is when an analyst loves a stock long term but downgrades it because of a short term price hit.

Recently, one Wall Street analyst downgraded JAKK from "BUY" to "Market Perform" because 3Q earnings were going to come in 13 cents lower than he had previously anticipated. In fact, the market as a whole "downgraded" JAKK from $21.50 a few weeks ago to $8.50, and who knows how much farther it will drop before everyone realizes what a bunch of idiots they've been?

This drop is precisely 100 times the anticipated shortfall. So apparantly JAKK is only worth 5 times its 1 year earnings but any earnings surprise is worth 100 times the surprise. At this rate, another 8 cents in earnings surprise and the stock should be free (in which case it will doubtlessly be downgraded to "hold" or "avoid". Actually, JAKK is practically free now because they have over $3.50 a share in cash with no debt. So the stock is really selling for $5, really has earnings of around $2 for a pe of 2.5 for a company that has a historical growth rate of 120% per year. I haven't fired up my Kray lately, but it seems like that might qualify as Growth at a Reasonable Price. (Even the downgraded 3Q estimate is 20% above last year's number.)

And why the shortfall? Because the COMPETITOR'S line of WCW action figures are selling so poorly that they had to be massively discounted and might be discontinued. The wholesale dumping of the competing brand has made JAKK's products slightly less attractive at full price. Excuse me? If the headlines read "Pepsi drops price to 5 cents a can as Coke sales rise 20%" it should seem obvious to anyone that Coke won the cola wars and is now positioned to reap the benefits. But of course in this instance Wall Street would probably downgrade Coke.

What frosts me the most is that the same article about the downgrade goes on to state that the analyst "still expects JAKK to be a $1 billion company within 5 years". HUH? There are only 19.5 million shares outstanding, with 1.5 million being repurchased through a stock buyback. If the 18 million shares will be worth $1 billion in 5 years, then the stock will be selling for $55. It's currently at $8.50. The jump to $55 would be a 45% annual return. This rate of return is so great that if an 18 year old put $2000 per year into an IRA and got 45% annual return, by age 70 his IRA would be worth over $150,000,000,000.00.

So the sort of investment that turns a Burger King manager into Bill Gates is a Market Perform? But a stock that drops 60% of its value in 3 weeks is a BUY? Well that certainly makes sense.

And did anyone expect that JAKK would become a billion dollar company strictly by selling Wrestling Figures? If so, what was the world of tomorrow to look like? Were JAKK figures to cover the entire surface of the globe to ankle high just to satisfy the fickle demands of Wall Street? And was its 120% growth rate expected to continue indefinitely or did we think it might possibly slow down a bit?

The fact of the matter is that JAKK made a phenomenal amount of money on WWF figures and parlayed that into buying several other companies (Flying Colors, Road Champs,Remco, Pentech, Child Guidance) which they are rennovating to be just as scrappy and profitable as them. The WWF license shouldn't have been seen as the totality of JAKK. Rather, it was representative of the sort of lucrative license they could attract. They now also have extreme sports and Harry Potter licenses with many more to come. By selling toys kids want to buy anyway, they save millions on advertising. And since all their products are made to order and shipped direct from the factory, they aren't saddled down with warehouses full of unsold inventory, and they can give retailers a profit margin 2-3 times greater than the competition.

JAKK was a great buy at 21. It's an even better buy at 9. If it goes to 6, it will be an even better buy. And don't be surprised if those Harry Potter products start flying off the shelves and the stock shoots up again. Don't wait for the stock to triple again before Wall Street gives you its green light to buy. Buy JAKK now. It won't be the dumbest thing you've ever done.

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