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No. of Recommendations: 5
Thanks for the kind words, Deli. The last few days I've been trolling around the CSCO message boards trying to talk reason, history, and valuation. Let me tell you, those people are animals. Lose a few hundred billion in market cap and everyone gets all cranky.

I certainly don't know much more about JAKK than anyone else, except what I can see and read with my own eyes. It appears to be a very fundamentally sound company with a pretty hefty margin of safety built into the asking price. I do own a collectibles store that deals extensively with action figures, so I was mildly familiar with JAKK before I bought into it. I can tell you that the WWF is extremely popular with its target audience. Not that it matters. When I was a kid, we were crazy about Marx, Mego and Ideal toys. Those companies are all out of business now.

I do know that the founder of JAKK used to be the braniac behind LJN toys, which manufactured really thick rubber wrestling figures in the 1980's, made a pile of cash, and quietly went away. My impression is that he learned something from the experience which is why JAKK is so into diversification. I can also tell you that JAKK's product has vastly improved over the years. Not that there's a direct correlation between quality product and staying in business, but it's nice to know they're trying.

When I buy a collection of rare toys from someone off the street, I like it if the deal is so good I don't even have to look at everything I'm buying before I get it. If I have to go through the box, count each and every item, reckon the possible retail I might get and figure the maximum I'm willing to pay for each component, then I know I'm not getting a good deal and I'll pass on the offer.

A similar frame of mind strikes me when I invest. I bought Warner Lambert stock even though I didn't know every single thing they did. I bought Philip Morris because I reckoned that Kraft alone was worth the then-low price. I bought Sun Microsystems because they had incredible fundamentals and at that time the semblence of a sane valuation. I bought Sonic just for the eggnog milkshakes. I've subsequently sold all those stocks, yielding a decent return on each one. I did a reasonable amount of research but didn't spend nights pouring over balance sheets looking for "hidden value". If the value wasn't staring me right in the face I wasn't going to look very hard for it.

Believe it or not, in my real life, my customers expect me to be a total expert on investing. They want me to know what their rookie cards will be worth in 10 years. They want to know which comic books will be hot. They want me to know which rare toys they should pick up at Toys R Us. I always tell them the same thing, "anything will increase in value if people want it more in the future than they want it today." They generally find this answer very disturbing, and usually find some slick dealer who will stroke them a bit and tell them "these beanie baby pogs are HOT! You'll make a fortune if you buy them from me today. In ten years, you'll be able to retire". Of course, the hot stuff never stays hot and the people who fall for this line wind up broke, frustrated, and yelling at me for overpaying for crap they didn't get from me and I never told them to buy.

Having collected stuff for my entire life and having seen 10,000 markets come and go I somehow always thought the sophisticated world of stock market investing was beyond this sort of thing. Boy was I wrong. It's exactly the same, only worse. For instance, in sports cards, people will often pay hundreds of dollars for a brand new player's rookie card before he even plays one game in the pros. They'll say "when this guy is a hall of famer, the card will really be worth some money". The only problem is, they wouldn't pay anything for a hall of famer's card that's decades older and infinitely scarcer. It's the same way with IPO's. People will pay hundreds of times earnings for an unproven company, yet spit on the stock of an industry giant at 8 times earnings. I could go on and on, but the fact is, if it happens in the stock market, it's also happened in the collectibles market.

One thing I've learned over the years is a few tricks for picking out good deals. Sometimes people are so obsessed with finding the BEST deal that they don't get any deal at all. Like if you were at a comic shop and they had 100,000 comics you might not even know where to begin and walk out buying nothing. Here's a trick. First, narrow down the universe to a handful of possible selections (say 5 items). Then pick what seems to be the best deal of those 5 items.

Again, it's the same with stocks. Narrow the list of the thousands of stocks in the world to just a few dozen. Then pick out reasonable buys from just that list.

I use another trick at collectibles shows. It's very tempting (for me) to buy nearly every item you see. If you like an item, put it down and walk away. If you wander all the way across the room and the item is still calling you, then buy it. So if you've been tracking a stock for weeks and you can't get it off your mind, then maybe it's time for an initial position.

Know what kind of gambler you are. Some people would be mad as hell if they won 2nd place in the lottery. Others would be happy if they walked out of a casino up $1. These people should have very different investing strategies. The first kind would be the type who looks for bottle rockets to soar 500%. They might pick 10 stocks hoping one of them triples and the rest can be cut at a 10% loss. This is the type of gambler William J. O'Neill is and it is at the heart of his CANSLIM philosophy. Me, on the other hand, I hate to lose more than I like to win. So I'm looking for stocks with a considerable margin of safety attached to them. But to me, "margin of safety" isn't just low price. It's sustainable quality.

Once I find what seems to be a decent investment, I buy a position. After that, my only purpose for trading is to lower my dollar cost average. Mathematically, this can only be done by buying more of the stock at a lower price or selling some at a higher price. As you know, JAKK has been extremely volatile. I've bought at 19, 16, 16, 11, 10, 9, 8, 7, 7, and 8 (all numbers are "plus change".) I've sold at 17, 18, 9 and 9. All this activity has brought my dollar cost average all the way down to $9.03, fully 53% below the $19 where I made my first position. I didn't want to do all this trading. I would have been perfectly happy if JAKK had simply soared from $19 to $50.

In fact, the market has been so volatile in the past few months that I've been able to lower my dollar cost average on every one of the 11 stocks I own, even though I've been fully invested in the market at all times. You see, my strategy isn't to make money. It's to accumulate shares of stock. That's why, long term it's very, very important that the shares I'm accumulating are worth owning. There's no sense piling up the shares if they're going to be worthless. Also, I'm fully cognizant that by adopting this strategy I'm giving up on relative strength and proper portfolio balance. At one time JAKK was over 30% of my portfolio.

OK. All that having been said, what about JAKK? I think it's as sound as anything else I can think of. There are a couple of red flags. For instance, last year at this time they issued some additional stock I think for the Flying Colors purchase. This stock was issued in the $20 range. Later this year, they repurchased stock in the $8 range. Not a bad move, really. If only Priceline.com had thought of it, they might be solvent right now. The question is, did the millions of dollars JAKK made on this deal make artificially inflate their financial picture? I hope everyone sees this is the kind of thing you can't do every year. I don't know the answer. Like I said, I haven't been paying that much attention. Second question- how much of their sales/income is due to any particular line? Like if Road Champs drops off the face of the earth, does it hurt JAKK a little or are they dead in the water? Again, I don't know the answer. But I suspect that as time goes on, they are less dependent on any one line to pull them through.

On the other hand, JAKK does have some superior fundamentals. Where did they come from? I don't think they're just lies. I think it's because JAKK has a different business model than the competition. They make product to order and ship direct. They pay less in advertising and cut the retailer in for a bigger profit. They have no debt and therefore no interest payments. They have low SG&A. Stuff like that.

If JAKK had a 50 PE maybe I'd be paying more attention to the P's and Q's. As it is, I think there's a considerable margin of safety. Last I checked, JAKK had about $12 in current assets per share, of which $3.50 was cash. Even assuming some of these are overvalued, it makes the stock pretty close to free right now. This is the other factor of the "margin of safety". The fewer things that have to go right in order to justify the price, the better. Like CSCO is only worth the money if they continue to dominate the market, the internet continues to expand at breakneck speed, they pioneer new technologies and their 90% growth rate continues for several more years. By comparison, JAKK's price is justified as long as the CEO doesn't take off for South America with all the money.

I don't know how long it will take for Wall Street to notice this. Every time some overpriced tech stock "disappoints", my JAKK goes down. I think the logic is, a Nasdaq stock is a Nasdaq stock, whether the PE is 5 or 500. After each big drop, I always check the recent news. Usually it's something like "WWF Smackdown smashes UK sales record for fastest selling video game ever." Things can't be that bad.

It wouldn't break my heart if you opted to buy HOTT instead. That's another irrationally undervalued stock. Some of my other favorites right now are OSI, PPD, TLAB, WPI and XLNX. I own other stocks but these are the ones that have been hit the hardest by irrelevant news. So that's 7 stocks for you to check into. If JAKK is still calling you after all that, then buy it already.
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