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Here is the Harry Potter situation as I understand it.

Warner Brothers obtained a master license to manufacture Harry Potter related stuff. JAKK's subsidiary Flying Colors got a license from Warner to manufacture a line of Harry Potter activity stuff. Much of the Warner Brothers stuff will actually be manufactured by Mattel (MAT).

If you want a stock play involving Harry Potter, the most direct would be Scholastic Publishing (SCHL), which publishes the actual books. Additionally, they publish other wildly successful lines of Children's books such as Goosebumps. They're making a fortune. When I was a kid, all they published was the Weekly Reader and books like 101 Pickle Jokes. HOWEVER, the next Harry Potter book isn't due out for another year and a half, so stockwise anything could happen.

Another more direct Harry Potter play is Department 56 (DFS), which makes upscale knick-knacks and is licensed to make Harry Potter stuff. I don't know if anyone is going to buy them though. Some of their knick-knacks are pretty pricey.

Time Warner (TWX) can make a lot more money with Harry Potter stuff than JAKK but the difference to their multi-billion dollar balance sheet will be negligible. Plus their stock is selling for a hefty premium relative to the market.

For the old geezers out there an "Activity Book" is what we used to call a "coloring book". The difference is that in addition to pictures to color, there are mazes, word searches, crossword puzzles and the like. You can't give a "coloring book" to anyone past the age of 5 these days, but an "activity book" is acceptable to boys and girls all the way up to puberty.

My method of stock picking is to look for quality first, then value second. I haven't thoroughly examined all these stocks but at a cursory glance, here is what I came up with:

SCHL is a very sound company and somewhat attractive pricewise. However, their fundamentals and price might be exaggerated by the huge cash inflow they experienced with Goblet of Fire. Additionally, the next Harry Potter book isn't due out until November 2001. If you're going to buy the stock, look at some of the long term fundamentals first. At a quick glance, though, it is an attractive stock.

MAT has some problems with their fundamentals, especially weak growth and burdensome debt. It is cheap though. Someone who looked at price first and quality second might find it attractive after digging deep into the balance sheet.

TWX is inefficient and overpriced, especially since the AOL deal was announced. TWX is similar to Disney (DIS) in that they make money because they are so big, but they don't really allocate their resources efficiently.

DFS is suffering from lackluster sales of their core Christmas Village series. They have debt issues (debt greater than equity) and poor growth (mostly negative), but generally decent margins and the stock is at a discount to the market (probably deservedly so).

JAKK is fundamentally excellent and severely underpriced but they stand to make less money from Harry Potter than any of the other companies. A recent eBay search revealed that people were trying to get hundreds of dollars for rare 1st print Scholastic books, close to retail for most Department 56 items, and $5 for the Flying Colors activity books. This shows you that as far as the fans are concerned they want the books far more than oddball licensed stuff. This might change if there is a movie or a tv series, but don't bet the farm on that. For all you know the movie could suck and go direct to video. Or the movie might have separate licensing which might not benefit any of the stocks already mentioned. In my experience, when starry-eyed investors (stocks and collectibles) shout "wait til the movie comes out", it rarely pans out. Hasbro stock was $41 a share before Star Wars Episode I came out and $15 when the video hit the shelves.

So there you have it. If you want to cash in on Harry Potter, your best bet is SCHL. I'm bullish on JAKK not because I think Harry Potter will make billions for them but because their Harry Potter license indicates to me that they are aggressive and scrappy. As long as JAKK has no debt and manufactures items to order, they can potentially make a lot of money for their shareholders with very little risk. A good example of this is JAKK's line of Charlie's Angels dolls. I don't know if these are going to fly off the shelves this Christmas or languish in the bargain bin. But as I understand it, Charlie's Angels is the #1 movie at the box office, and if the dolls do bomb, it will be the retailers taking the hit rather than JAKK. However, I'm under the impression that JAKK sells their stuff to the retailers cheaper than HAS or MAT (because they make product to order and ship direct from the factory) so even if they have to be discounted the blow will be cushioned somewhat.

Besides, JAKK is so cheap that it would have to be $40 a share just to match the broader market. There are worse things you could do with your money than pick up JAKK at $8 and change.
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