Daily Gains Letter

JAKKS and LeapFrog: Two Contrarian Toy Plays for Your Watch List

By for Daily Gains Letter |

JAKKS and LeapFrogWhat kid doesn’t love toys? But then again, what investor doesn’t love toys? They did, after all, gain traction in 2014, growing at four percent to $18.08 billion in U.S. sales. (Source: NPD Group, January 20, 2015.)

When we talk about the toy sector, companies such as Mattel, Inc. (NASDAQ/MAT) and Hasbro, Inc. (NASDAQ/HAS) usually come to mind as the top and biggest players. While Mattel and Hasbro may be a good investment opportunity, there are better risk-to-reward situations for more aggressive speculators who don’t mind taking on more risk to try to achieve higher gains. Here I’m referring to small-cap stocks in the toys sector.

Small-Cap Contrarian Toy Stock #1: JAKKS Pacific, Inc. (NASDAQ/JAKK)

The first of two stocks to watch in the small-cap toy area is JAKKS Pacific, Inc. (NASDAQ/JAKK; $5.92; Market Cap: $130 million), which is small compared to Mattel and Hasbro. JAKKS has lost 6.03% of its value over the past 52 weeks, underperforming the 9.63% advance of the S&P 500. At this time, JAKKS would be an aggressive investment.

The stock is down more than 30% from its 52-week high of $9.48 on July 17, 2014, which makes the stock an interesting one to watch as the company looks to deliver better results and profits. After a loss of $2.43 per diluted share in 2013, JAKKS is estimated to earn $0.66 per diluted share in 2015.

Jakks pacific Inc Nasdaq

Chart courtesy of www.StockCharts.com

To achieve better results, JAKKS is moving with the times and shifting its focus to technology-based toys and electronics.

Compared to the big boys, JAKKS has a better valuation, but investors truly interested in this stock need to exercise caution, as it could also be a value trap if a turnaround fails.

JAKKS trades at 0.19X its trailing annual sales, versus a much higher 1.53X for Mattel and 1.54X for Hasbro. In my view, JAKKS can appreciate faster if it can deliver. On this note, sales are estimated to rise 19.3% to $754.83 million in 2014, followed by a 0.2% decline to $753.04 million in 2015, according to Thomson Financial. The estimate for 2015 is a concern, but it could change if things work out.

Watch the significant short position at 66% of the float, or 8.34 million shares, as of December 15, 2014. A rally in the stock could drive short covering support and produce an investment opportunity.

Small-Cap Contrarian Toy Stock #1: LeapFrog Enterprises, Inc. (NYSE/LF)

The second small-cap to watch in the toys sector is LeapFrog Enterprises, Inc. (NYSE/LF; $3.95; Market Cap: $277 million), which traded over $40.00 in 2003, but it has been showing a different story since then.

I recall my son playing with LeapFrog electronics a decade ago and thought the company had potential as an investment opportunity. Clearly, there have been some execution errors.

LeapFrog Enterprises Inc NYSE

Chart courtesy of www.StockCharts.com

LeapFrog has been around for two decades and is probably more recognized by those who have kids, rather than by kids, as the company produces many earlier-stage toys for babies and infants. The toys and games are technology-based learning products. The products are geared toward early-stage learning and include numerous software titles in such topics as phonics, reading, writing, math, music, geography, social studies, spelling, vocabulary, and science. The company’s products are sold in more than 45 countries worldwide, along with being used in more than 100,000 classrooms in the U.S.

LeapFrog appears to have the correct business model, but it needs to execute. The company fell short on its Thomson Financial consensus estimates in the last two quarters and is losing money. Profits are expected to return in fiscal 2016. The company is estimated to grow its sales by 7.2% to $488.18 million in FY16 (ending in March 2015).

A big plus for those interested in this stock is that you are not paying that much for the company’s assets after discounting out the cash of $1.59 per share and no debt, meaning you are paying about $2.36 for the assets.

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