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No. of Recommendations: 7
Full disclosure: I am long on JAKK. Every time JAKK has dropped in price significantly, I have bought more JAKK to lower my dollar cost average. With the recent mood swings of the market, this means I have bought quite a lot of JAKK rather often. I bought JAKK at $19, $11, $10, $9, $8, and $7. So while the stock has taken a 65% dump in price over the past 2 months, I have taken advantage of the opportunity to buy more and am now dollar cost averaged in at $9.75. Or I have been "suckered" into buying increasing quantities of a stock that is rapidly becoming worthless. Only time will tell.

If you have never bought JAKK before, that means you can dollar cost average in at the current price of $7 and change and be at least 20% up on me, and 70% up on anyone who bought in at the 52 week high of 29. Bully for you. But before you throw down your hard earned dollars, you might ask yourself "is this a trap? Are there reasons why the stock has plunged so far down? Will it go down farther?" Fair enough. I've asked myself those same questions about a million times over the course of the past 2 months. Here are some reasons I've come up with as to why Wall Street is avoiding the stock:

NOBODY HAS EVER HEARD OF JAKKS PACIFIC. Of course they haven't, unless they are a WWF action figure collector who is also a bargain hunting stock picker. And what kind of freak of nature is that? The fact is that JAKK is still very small with a lot of room for growth. Half of their products don't even say "Jakks Pacific" on them and they do almost no advertising whatsoever. This is one reason why their margins are so big.

* IT'S A TOY STOCK. Wall Street is inherently afraid of toy stocks because they are "faddish". Most of the time that is. The other times The Street is caught up in some toy craze, bidding Hasbro through the roof in 1998 (because of Star Wars Episode I), Playmates to the moon in 1988 (because of Teenage Mutant Ninja Turtles), and Coleco into other galaxies in 1984 (because of Cabbage Patch Kids and Colecovision). All this bullishness is followed by the inevitable "earnings disappointment" where the stock is punished beyond belief. (HAS went from $41 last year to $9 last month despite having some of the best selling toy lines in history). Even Peter Lynch (normally the standard of stock market sanity) in one of his books said he has to avoid toy stocks as being too complex. Here's a guy with 1500 different stocks in his portfolio, but he can't figure out that girls like Barbies and boys like GI Joes AND he's not alone. So don't expect Wall Street to suddenly pick up on JAKK.

* IT'S A WWF WRESTLING STOCK Nobody likes to admit that they watch Wrestling, much less invest in it. It's only been America's most profitable sport for like 20 years. WWF pay-per-view events routinely pull in more dollars than the Super Bowl. You never hear of the WWF going on strike or threatening to move to another city unless someone builds them a new stadium. All they've done is make ungodly amounts of money for the past 2 decades and divide it up among a few dozen people. That is, until recently. Now that WWF has gone public, there is pressure on their bottom line. The few dozen people who used to share the wealth has become a few thousand. And they want results with the WWF. Same with JAKK. If you inherited a company that made $38 million last year selling Wrestling stuff, you'd be happy as punch. But if you own a stock that makes $38 million a year selling wrestling stuff, you want to know, "can this continue?" "When will it end?".

This ignores the fact that JAKK has taken most of their profits from WWF and bought up half a dozen other companies (Child Guidance, Flying Colors, Remco, Pentech, Road Champs) and now have dozens of lisences big and small that appeal to virtually every segment of the population. They make baby stuff, toddler stuff, boy stuff, girl stuff, teenage stuff and adult stuff. To me, the WWF was just an example of JAKK's potential (it was the #1 action figure line by far when Phantom Menace stuff was supposed to be all the rage). But to Wall Steet, it is the totality of JAKK, and the stock's fortunes rise and fall with The Street's attitude toward the WWF (which is currently not that high.)

* IT DISAPPOINTED ANALYSTS. We all know that the last month the NASDAQ has been particularly cranky with stocks failing to meet analyst expectations. This makes a lot of sense for the high flying tech stocks that are selling for 150 times sales. In JAKK's case there are only a small handful of analysts covering the stock, all with some pretty odd expectations. The "big bombshell" that JAKK was being "downgraded" because 3Q earnings would come in 20% below "forecasts" sent the stock down more than 50%. It seems pretty extreme when you realize that the downgrade was to "buy" from "strong buy", the stock was selling for 10 times earnings before the downgrade, and 3Q revenue growth came in at 53%, with earnings growth at 28%. AND that same analyst still maintains JAKK will be a billion dollar company in 5 years, about 7 times its current value.

* IT HAS LOW RELATIVE STRENGTH. In other words, the stock is going down because it is going down. Kind of weird logic, but it's worked on Wall Steet before. Lately, though relative strength can shift on a dime, so don't be surprised if by the time you figure out the stock isn't slumping anymore it's doubled in price.

* EARNINGS GROWTH HAS SLOWED. Not that The Street believed JAKK's earnings growth would continue, since its 5 year growth has been over 120% per year and the pe of the company has historically been in the low teens, but the logic must hold that if the company was "properly valued" when the pe was 12 and the earnings growth was 120% then it should be cheaper when the earnings growth drops to "only" 28%. For fans of Investor's Business Daily, this means its EPS rank has fallen from 99 to 94. Horrors! But it's still in the top 6% of all stocks for EPS momentum and it has taken a hit not felt by over 90% of the other stocks.

* THERE IS A WORLDWIDE CHIP SHORTAGE. A great deal of JAKK's WWF revenue comes from its wildly popular computer games which apparantly cannot be made fast enough because of a shortage of components to make them. Exasperating this is that the "chip shortage" means that there aren't enough Playstations or Gameboys in the world so that naturally cuts into software sales. Never mind the fact that all of my chip stocks also tanked recently because the chip market is "mature". Make up your minds, guys. All I know is that Playstation II is selling out everywhere and JAKK makes 2 of the top video games in existence. Someone on the Motley Fool message boards mentioned that by buying Pentech, JAKK now had inroads to foreign chip suppliers. Either way, the chip crisis can't last forever and if it does, it will affect everyone else too.

* THEY HAVE NO HOT PRODUCTS. Actually, right now nobody knows what is going to be "hot" this christmas, and if they did, they would probably punish the stock for indulging in a fad. But despite making WWF stuff, Harry Potter stuff, Power Puff Girls stuff, Road Champs, Goooze, Charlie's Angels and Elle dolls,
there is no one sure-fire winner set up for this Christmas season. Apparantly, Wall Steet feels that the safer play is in high-tech Optical Networking Solutions stocks rather than "risky" toys. Ask any kid what he wants for Christmas and she'll say "I want an Optical Networking Solution". Anyway, who knows what toy will be hot this year? Name one thing. Bet you couldn't. So whatever is the next hot toy is just as likely to be a JAKK product as anything else. Besides, Hasbro right now (which is in a lot more serious financial pickle than JAKK) is dumping licenses left and right. Who knows what they might dump onto JAKK's lap? After all, it was Hasbro that dumped wrestling figures a few years back that enabled JAKK to exist in the first place.

* THEIR BALANCE SHEET COULD BE A LIE. This is always a concern for value-minded investors and if the stock had a higher valuation (or was overvalued relative to the market) then it might require more scrutiny. As it is, JAKK is so ridiculously cheap that there is already a huge "margin of safety" between the "true value" and the current price of of the stock. For instance, JAKK is selling for just 0.7 times sales, whereas many other stocks typically trade for 9 times sales. Sales are really hard to lie about, but even if they were exaggerated somehow by 2x, then JAKK would still be selling for 1.4 times sales and would still be a terrific buy. JAKK has "no debt" (except some stuff left over from the Pentech deal), but in times past they have issued more stock rather than incur debt. That sort of thing does make me nervous, but recently they have been buying back shares so I'm not too concerned about them suddenly issuing more. Of course you can always screw around with profit margins and such, but so can any other company on the face of the earth and I have no reason to believe that JAKK's balance sheet is any more or less accurate than 1000 other companies you can name. The most interesting thing to me is that JAKK has high cash per share (somewhere around $3.50 at last count), so it's really even cheaper than it sounds. In fact, if you add up all the current assets, they come to around $11 a share, making the stock practically free even if half of these current assets are overvalued or overstated.

* THE PRICE OF OIL IS SKYROCKETING. This is no small thing considering that oil is a major component of plastic, but if oil goes up, everyone in the toy industry will be hard hit, and the ones with the smaller profit margins (MAT and HAS) will be hit even harder.

* THE US ECONOMY IS GOING TO HELL. Again, it rains on both the just and the unjust. When the depression comes I'd rather be locked into stocks with big margins, no debt and solid historical growth selling at a huge discount to the market than the other kind.

* THERE ARE LOTS OF BARGAINS IN THE MARKET RIGHT NOW. A lot of growth stocks have been hard hit recently and there are a lot of bargains to go around on Wall Street. 2 months ago, JAKK was one of the only profitable growth companies selling so cheap. Now with recent hits to other stocks there are a lot of big cap bargains floating around. Ironically, when JAKK was $20 a share, it was one of the best value plays around. Now that it's $8, and an even better bargain, there are lots of other bargains staring investors in the face. All other things being equal, I would rather have a large cap company than a small cap company with the exact same margins, growth, value and debt levels. NOBODY KNOWS WHEN THIS WILL ALL END. INTC and MSFT have already dropped over 50% from their recent highs. If they somehow dropped another 50% I would rather have them than JAKK. The whole market is in a wait and see attitude.

* THE REAL MARKET HAS BEEN BEARISH FOR NEARLY 2 YEARS. Almost every stock being traded today was cheaper at some point in the past 2 months than it was at some point in 1Q 1999. Most of the indexes have been exaggerated by the few big winners. Now there suddenly seems to be a shift from growth to value which has taken place only over the past few months. This might be the beginning of a value bull market or the beginning of an overall bear market. If there is a value bull market, JAKK should benefit greatly as it will show up on almost every value-based stock screen (except for dividend plays). On the other hand, if there is a big crash coming, don't expect JAKK to suddenly stand out of the pack.

Anyway, these are a few of the concerns that I've come up with. Overall, I'm very confident that JAKK is a great buy right now. I haven't scrutinized their balance sheet or their recent earnings report because their valuation is so low that all I wanted to make sure from their 3Q earnings report is that they are still a company and actually making money. Similarly, I haven't figured out fool flow ratios or any exotic numbers since the plain numbers they already have are so outstanding that it seems silly to dig too deep. If anyone else wants to do more homework than me and figure out reasons why I should avoid JAKK at $7, then please post them asap.

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