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On October 9, 2000 JAKK started at 8 1/4, fell 14% to 7 1/8 and then rose back to its original starting point before lunchtime. That's a 30% swing in only a few hours. Some stocks don't have that kind of trading range in the course of an entire year. (Not lately though thanks to the evil day traders).

Usually when a stock drops 14% in an hour it's because some earth shattering news is developing. Either the CEO is about to be arrested for stock fraud or he's run off with a topless dancer. But in this instance there was no news all day. Nevertheless, I bumped around the internet and my local Toys R Us and came up with some startling facts.

For one, JAKK is apparantly an actual company. They really are situated along the Pacific Ocean in Malibu California and they really manufacture toys. "Toys" are miniature replicas of people or things that are played with by children. "Children" are miniature versions of adult human beings. They are similar to stock traders except their attention span is usually longer.

JAKK made millions with its hugely popular line of WWF action figures. It used this money to buy half a dozen other toy companies and is now well diversified with lines that appeal to every toy consumer of any age and gender. They have toys for babies and toddlers, toys for adult collectors, and even toys for boys and girls. Rather than rest on their WWF laurels they have been aggressively courting liscencing agreements from all sorts of TV shows, Movies, Books, Video Games and other Pop Culture phenomena. Besides WWF they have major or minor agreements with Charlies Angels (the movie), Harry Potter, Road Champs, Powerpuff Girls, Schwinn, Elle Magazine, Extreme Sports, and dozens more. Additionally, they have developed Goooze and a line of G.I.R.L. dolls that is going head to head with the mighty Barbie.

Now I'm not saying all these lines are going to be the next Pokemon. But it indicates to me that JAKK is aggressive, scrappy, and hungry to climb up the ladder to toy company superstardom.

They appear to be halfway there. A recent eBay search I conducted for JAKK* yielded nearly 1,000 items for sale, compared to 5,000 for Hasbro and 7,000 for Mattel. By comparison, a similar search for Xilinx yielded only 1 hit, and it sells for 40 times earnings.

There are two things I look for in a stock: quality and value. I know it's unfashionable right now to look at a stock's fundamentals or price before you trade, but I'm kind of silly that way. I define quality as such: The more good things you can say about a company compared with its competitors or the broader market, the better it is. The more things the market and the competition has over your stock, the worse it is.

Going to Multex.com, I find that JAKK beats the recreational products industry, the consumer cyclical sector AND the S&P 500 in 29 important categories:

low P/E ratio, low P/S , low P/B, low P/ tangible Book, low P/ Cash Flow, High % institutional ownership, low dividend payout ratio, high 1Q sales growth, high 1 year sales growth, high 5 year sales growth, high EPS 1Q growth, high EPS 1 year growth, high EPS 5 year growth, high 5 year capital spending growth, high quick ratio, high current ratio, low LT debt/equity, low total debt/equity, high interest coverage, high pre-tax margin, high net profit margin, low tax rate, low 5 year tax rate, high return on assets, high 5 year return on assets, high return on investment, high 5 year return on investment, high revenue/employee, high net income/ employee.

By my count, that's 29 good things you can say about JAKK where it trounces other toy companies, other consumer products companies AND the s&p 500 companies. By comparison, here are the categories where JAKK is weaker than all 3 levels of competition:

low dividend yield, low 5 year dividend, low dividend growth rate, low EBITD margin.

Assuming you care about dividends (those aren't fashionable these days either), that gives JAKK a record of 29 wins and 4 losses for a stunning .878 average. (Most companies scrape by around .250).

Now many of these numbers are old data and I don't know what kind of bombshell 3Q earnings report is going to be released this month, but unless the CEO took off with all the money it's a fair bet to say JAKK is undervalued. And even if this did happen, JAKK could still reorganize and be hugely profitable faster than Red Hat or Priceline.com.

If the big news that recently sent the stock down over 60% is simply that sales of WWF figures has slowed then I'd say the selloff was overdone and quite unjustified. Obviously investors didn't believe the WWF phenomenon would continue indefinitely because JAKK's pe has been bumping around 10-15 all year while the S&P 500's pe has been in the high 30's. Now if JAKK's stock price had been pumped up by lofty expectations to a pe of 50, 80 or even 100, then I could see some cause for alarm that 3Q earnings might "only" be 20% higher than last year.

By the way, I once calculated that if JAKK's 134% 5 year growth rate could continue indefinitely that the stock would be worth at least $1,500,000.00 per share within 10 years. If that does happen, I promise to buy each and every one of you a Power Puff Girl Activity Case.









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Hi everyone,

The Fool alerted me to this one:

http://www.fool.com/news/foth/2000/foth001026.htm

After the 30 second look, I'm even more amazed. Zipped through the posts and didn't see a comment on this one: Trades at .82 of book! I've never heard of such a thing. With the clean balance sheet, high margins, and exceptional growth rate, I can't for the life of me figure out what's wrong.

After a few years of dabbling in the Celeras and Sun Micros of the world, I'm looking to add a bit of value to my portfolio. Am I missing something here? Is there a secret time bomb I'm missing?

Wishing I could do my DD faster,

-S
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OK, I did spot one thing, but doubt the market is thinking about it.

For the last two quarters, JAKK has seen a big bump in receivables and a decrease in payables, impacting significantly on cash flow. They've also been cashing a lot of marketable securities, perhaps as a little cosmetic repair to the cash flow statement.

Of course, this is agian a 30 second analysis (gotta work, ya know) and was wondering what the JAKK experts thought.

-S
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OK, I did spot one thing, but doubt the market is thinking about it.

For the last two quarters, JAKK has seen a big bump in receivables and a decrease in payables, impacting significantly on cash flow. They've also been cashing a lot of marketable securities, perhaps as a little cosmetic repair to the cash flow statement.


I noticed that too. Basically, JAKK went from a long string of flow ratios of near 1.0 to ratios of 1.7 for the last two quarters (or thereabouts - I don't have the numbers right in front of me). That's quite a jump, but because they have been historically pretty good about managing their money I'm assuming that this is a short-term anomoly. My understanding is that Pentech wasn't managing things very well, and that this has been reflected in JAKK's current numbers since the acquisition. If this is the case, I don't think this will be a long-term thing at all.
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If you're into Sun Microsystems, then you know that 5 years ago you couldn't give that stock away. In 1995 it bottomed out (pe wise) under $2 or 8 times earnings. Earlier this year it hit the high 120's or just over 100 times earnings. If the stock was still at 8 times earnings, it would be a $10 stock. So $8 of SUNW's $128 rise was due to increased earnings. The other $120 was due to a change in investor's attitude about the stock.

I'm glad to see at least one NASDAQ tech junkie take a second (or first) look at JAKK, because the only way for JAKK to go up is for its VALUATION to increase. As a company, it's been making more money year after year, but its pe has zig zagged from the low 20's down to single digits almost every year since it went public. Recently the pe was just under 5, and when you consider the current assets are just around $11 per share, the stock is actually pretty close to free right now.

In point of fact, JAKK as a company is about 1/3 as large as JUNIPER NETWORKS, (JAKK= $31 m income on $255 m sales, JNPR= $88 m income on $423 m sales) but stock traders are enlightened enough to "know" that JNPR is "worth" 70,000 million dollars, whereas those same people also "know" that JAKK is to be avoided at the price of 150 million dollars, or just under 1/400 the price.

This is because JAKK is in the unfashionable "toy" industry, which has only been active for about the past 10,000 years wheras JNPR is in the much more desireable "complex technology that nobody understands" industry. If the market liked JAKK as much as it likes JNPR, then JAKK would be selling for over $3,000 per share, and if the market disliked JNPR as much as it currently dislikes JAKK then JNPR would be selling for just under a buck.

In my next post I will deatail some of the "rational" reasons why JAKK is selling so low. There are some, but I think the market has way overreacted.
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In addition to the PenTech sort-out, JAKK's receivables and payables trend over the last couple quarters almost certainly has a fair bit to do with the seasonality of their business. Given that they are in the big ramp up to Xmas, their numbers look a little funny. Marketable securities apear to be getting cashed in in order to turn PenTech around and to finance the stock buyback (1.5 million shares so far).

The big reason that the stock is undervalued (and one you won't see in the numbers) is that the Street perception is that management "mislead" the analysts prior to the earnings shortfall announcement. I personally do not share the feeling, and I believe that we have simply seen a normal hiccup in a fast-growing company that is getting toward the top of the small company crowd. I'm more than happy to be patient, especially when I think of things like the Harry Potter license they have for next year's Harry Potter movie.

BTW, the PenTech acquisition was done in part to smooth out the seasonality of JAKK's earnings. While JAKK lives and dies by the Xmas season, PenTech gets most of its earnings from the back to school shopping season. If JAKK actually manages to cash in on the scooter craze with its electric scooter, the company should show a very nice spring as well.

(disclosure: JAKK is my largest single position. Do your own due diligence!!!)
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