Newsletter Watch: JAKKS Pacific

Steven Halpern | Jun 06, 2008 6:20am EDT | 1 Comment

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Validea, edited by John Reese, is an intriguing advisor service that assesses stocks based on the known investment criteria of "legendary" stock investors.

The origin of this newsletter, incidentally, was his book, The Market Gurus. The goal of the book, he says, was to find individuals who had a long-term record of outperforming the market, and then to find out as much as he could about their specific strategies.

Reese sought investment strategies that could easily be followed by individual investors. The gurus (those who ended up under his coverage) include Warren Buffett, Peter Lynch, Ben Graham, Martin Zweig and David Dreman.

The success of the book led to the launch of Validea, a newsletter that takes individual stocks and runs them through detailed screens against the requirements of these "guru strategies."

One of Reese's latest featured stocks is children's products retailer JAKKS Pacific (Nasdaq:JAKK), which passes the parameters based on the strategies of Kenneth Fisher, Peter Lynch and Benjamin Graham.

The $653-million market-cap company makes an assortment of children's toys and leisure products, such as Dora the Explorer and Pokeman playsets, Plug It In & Play video games and World Wrestling Entertainment figurines.

"To identify stocks that are selling at a good price, Fisher created the price-to-sales ratio (PSR). For non-cyclical companies such as JAKKS, my Fisher-based model considers PSRs below 0.75 to be tremendous values," he says, noting that JAKKS' PSR is just below that cutoff, making the grade.

He says that Fisher also likes companies with little debt, so his screen looks for companies with debt and equity ratios less than 40%. With a debt and equity ratio of 14.12%, he says, JAKKS passes another guideline.

Profit margins are also important to Fisher, Reese says. His Fisher-based model requires companies to have average profit margins of at least 5% over the past three years. JAKKS, he says, nearly doubles that with margins of 9.81%.

"My Lynch strategy considers JAKKS a fast-grower because of its 28.19% growth rate (based on the average of the three-, four- and five-year EPS figures). To find growth stocks selling on the cheap, Lynch famously used the P/E and growth ratio, which divides a stock's P/E ratio by its historic growth rate," he says.

According to the advisor, P/E and growth ratios below 1 are acceptable, while those under 0.5 are the best cases. With its 8.41 P/E ratio and a 28.19% growth rate, Reese says that JAKKS sports a 0.3 P/E and growth ratio, which, he contends, falls into this model's best-case category. "That indicates the growth stock is selling at a very good price," he says.

"Lynch likes companies that have manageable debt. For non-financials, the method I base on his writings requires firms to have debt and equity ratios below 80%. At 14.12%, JAKKS makes the grade," he says.

According to Reese, Graham was concerned with the intrinsic value of a company, not the hype or speculation around it. He wanted to know the real value of its business.

"One way he did this was by looking at current ratios — the ratio of a company's current assets (its most liquid assets) to its current liabilities (those that will have to be paid back first). Graham liked current ratios of two or more; at 5.9, JAKKS easily passes," he says.

Another way Graham targeted conservative investments was by looking at debt. JAKKS, he says, has $98 million in long-term debt, but $359.2 million in net current assets, a sign that it is financially secure.

"While known as ‘The Father of Value Investing,’ Graham did consider EPS growth. He liked companies to EPS by a total of 30% over a 10-year period without having any negative annual EPS postings in the past five years."

These firms tend to be financially secure and have a proven record of success over time, he says. Over the past decade, JAKKS' EPS have grown by 206%, and has posted positive earnings in each of the past five years, passing the test.

Reese says Graham also identified solid, defensive investments by looking at the P/E and price/book ratios. "He liked the P/E to be no greater than 15, using the average earnings for the past three years; with a P/E of 9.6, JAKKS makes the grade," he says.

"For the P/B ratio, Graham used an unconventional standard. He wanted the product of the P/B and the P/E to be no greater than 22. When we multiply JAKK's P/B of 0.94 by its 9.6 P/E, we get about 9.02, passing this test with flying colors," Reese says.

For more information on the company, read Jakks Pacific: Not all fun and games.

Steven Halpern has just compiled a 35-page report on alternative energy, featuring the favorite solar, wind, nuclear, coal and natural gas stocks from the nation's leading financial newsletter advisors. The report is available for free to all Small Cap Newsletter readers.

About the Author
As a newsletter editor and financial journalist, Steven Halpern has covered the investment newsletter industry for 25 years. Read More