Dear subs - I have been getting a number of inquiries regarding the large trading volume today and the significant intra-day volatility. In short - I am not sure, but it could be 1) holders of existing convertible notes converting into equity and selling in the open market, or 2) short-term driven traders taking advantage of the recent rally to sell down. As for me, I am in this to see my thesis play out over the next 4-5 months, not sell out for a quick buck. Of course none of this is investing advice, and what any individual subscriber does is out of my purview, but just wanted to put this out there to pre-empt further questions regarding this topic. FWIW, I've personally had better results historically by being patient with my positions, rather than trying to frequently trade in and out of them and "timing the market"
nice post. Have read similar view in seeking alpha at a slightly lower price point. Two stocks with equal or lower valuations are CATO and DXLG yet completely different stories. Seems JAKK is more of short term play. Good idea.
I have a few quick thoughts about the recent trading action and feel like current share price ~$10.25 is ridiculous. Caveat Emptor as earnings are right around the corner, but I think subs should take this into account:
This company has a strong history of "snatching defeat from the jaws of victory." That's my experience anyway, I hope anyone long has better luck. I speculate that it's due in part to them not really having much power over the license holders and hence not being able to generate consistently good margins. Even if you're right investors are unlikely to rerate the multiple higher due to their past disappointments and a general view that they don't have a good business model. This is only my 2c but given how many good ideas are out there it's hard to dig into JAKK again!
History has been messy - will definitely grant you that. However if my estimates are right and management sticks to their plan and pays down a bunch of debt with the FCF, I can’t imagine how the stock isn’t a massive home run from current levels. If the stock doesn’t go up at that point, mgmt. will then move onto buying back every share out there. I think there are limited ways to screw up, but anything is possible and of course I’ve been wrong before.
I like your spirit but man, look at that 5-year chart. That's with the same CEO in place mind you. I do really hope you are right and it works out but I write off consistently underperforming management teams every time - especially in a bad/tough business. This may be one of those really "special" situations where it works out but I think you are working very hard and swimming upstream here.
I don’t have a huge problem with your view. But every stock has a price, regardless of mgmt quality or biz model. I think 3.3x on my numbers is too cheap. Let’s see what happens in 6 months time
Nice post Plum. Do you have any updates on JAKK that might account for the recent price decline. Has anything fundamentally changed with the business or your thesis?
Yeah it’s a fair question… honestly think it’s more of the general market, small cap value has gotten absolutely destroyed this week. Many value focused investors I know are down ~10% or more in the past week or two, and I took a beating as well personally. Also could be converts selling down but I am not 100% on that. I realize that the price action is frustrating, but hopefully anyone involved has sized this so you can add lower. I am thinking of slowly getting more exposure here and more if it drops further.
Many thanks for the response. I appreciate the market has not been kind to your post (yet). I'll take comfort in knowing the overall Q3 catalyst and general re-rate is fundamentally unchanged and try to dollar cost down.
Is this really a Halloween reopening play? Halloween accounts about 20% of annual sales (or high 20s in Q3). The COVID delta for 2020 Halloween sales was only $20M. Halloween sales also have lower than corporates average gross margin. It appears that the company's weak sales had more to do with poor merchandising in the Toys segment (still selling Frozen 2 toys).
Yes there was some lapping of frozen that was a headwind in 2020 so you are right, but obviously Halloween very important to the biz. Just a matter of perspective I guess.
Great post! Do you have any idea why CEO Berman has so few shares even though he's (supposedly) a co-founder? I've glanced through some older 10Ks and even in the oldest one I could find, from 1999, he has only 0.4% of the shares.
Thanks Jaap. I'm not familiar with ancient history here but I would guess he owned more initially but sold down periodically since 1999. However, he owns 540k shares outright, and he gets paid $3-4mm per year (of which some is tied to performance). So he should be reasonably aligned with the success of the business. Also I thought it was interesting that he gets a $10mm lump sum payment in the event that they sell the Company. A buyout is not part of my thesis at all, but I wouldn't be surprised if it happens at some point down the road. I believe they need approvals from key licensors, but if this could be done, would be a no-brainer acquisition target for Hasbro or Mattel given cross selling and cost synergy opportunities
That's the strange thing, even in 1999 he barely had shares, and that was just a few years after the company was founded. Oh well, I was just wondering. I agree he's reasonably well aligned now. There have been a few buyout offers over the past years, not sure why they didn't materialize, but sure seems like a possible scenario. Thanks!
Yeah there's some messy history around a past buyout offer from Oaktree which was rebuffed by the Company. Because they underperformed thereafter, the mgmt. team was heavily criticized back then and left a bad taste in people's mouths. But I don't think it's too relevant to my pitch. I'm glad you enjoyed the post, regardless!
Great write up. Any colour on issues getting stock on time for Halloween, Chinese manufactures jacking up prices asked and container rates hitting 20,000 USD. How much cost push on merchandise have your factored in ?
It’s a risk for sure. Freight cost inflation has come up in the past quarters too, and mgmt. controlled it well so far. I know it’s gotten worse so tbd on the impact (I think really difficult to estimate accurately and didn’t want to overcomplicate my math as I’ll be wrong anyway). Rather I think the conservatism in my projections helps offset any negative surprises here. But we’ll see
I don't think the transport risk washes out if it goes wrong. Higher transport costs on a 30% GM product (see financials) is a significant risk. The greater risk however is the extra time it is taking to deliver product with ships sitting at anchor waiting their turn for weeks offshore Long Beach. Halloween items hitting shelves on November 1st would be NO BUENO!
Magellan, was taken over for $1 plus debt owed to their main supplier after delays and management logistical mistakes one season caused GPS units to hit the shelves THE WEEK AFTER CHRISTMAS!
You should call up management and question transport costs and contingencies for potential delays.
Already asked, got a generic answer. It’s a fair point but they will never tell you in too granular a detail. Yes transport is a risk, and I think it’s part of the reason why the stock trades here. But I do think the market is freaking out too much over it. We will find out soon. I have positioned myself such that if the stock falls, I have flexibility to add more if the situation warrants it
Dear subs - I have been getting a number of inquiries regarding the large trading volume today and the significant intra-day volatility. In short - I am not sure, but it could be 1) holders of existing convertible notes converting into equity and selling in the open market, or 2) short-term driven traders taking advantage of the recent rally to sell down. As for me, I am in this to see my thesis play out over the next 4-5 months, not sell out for a quick buck. Of course none of this is investing advice, and what any individual subscriber does is out of my purview, but just wanted to put this out there to pre-empt further questions regarding this topic. FWIW, I've personally had better results historically by being patient with my positions, rather than trying to frequently trade in and out of them and "timing the market"
nice post. Have read similar view in seeking alpha at a slightly lower price point. Two stocks with equal or lower valuations are CATO and DXLG yet completely different stories. Seems JAKK is more of short term play. Good idea.
Yes I am aware of DXLG. Will dig into CATO. As you mentioned, I like the short term nature. I want to get paid quickly if possible!
Mike is sharp. Have known him for years and a tremendous microchip manager. Track record second to none.
Thanks, will def check him out. Name sounds familiar but I don’t know him well
listen to mike Melby on Andrew walker's podcast.
CATO was covered by Andrew Walker on YAVB podcast, he's the one who pointed me to your blog actually.
I have a few quick thoughts about the recent trading action and feel like current share price ~$10.25 is ridiculous. Caveat Emptor as earnings are right around the corner, but I think subs should take this into account:
https://twitter.com/Plum_Capital/status/1418601240607576070
https://plumcapital.substack.com/?r=1gmkra&s=r&utm_campaign=pub&utm_medium=web
Hi!
Do you expect a negative impact on JAKK from the supply chain issues?
https://edition.cnn.com/2021/08/29/business/toy-shortage-supply-chain-shipping-holidays/index.html
Thanks!
This company has a strong history of "snatching defeat from the jaws of victory." That's my experience anyway, I hope anyone long has better luck. I speculate that it's due in part to them not really having much power over the license holders and hence not being able to generate consistently good margins. Even if you're right investors are unlikely to rerate the multiple higher due to their past disappointments and a general view that they don't have a good business model. This is only my 2c but given how many good ideas are out there it's hard to dig into JAKK again!
History has been messy - will definitely grant you that. However if my estimates are right and management sticks to their plan and pays down a bunch of debt with the FCF, I can’t imagine how the stock isn’t a massive home run from current levels. If the stock doesn’t go up at that point, mgmt. will then move onto buying back every share out there. I think there are limited ways to screw up, but anything is possible and of course I’ve been wrong before.
I like your spirit but man, look at that 5-year chart. That's with the same CEO in place mind you. I do really hope you are right and it works out but I write off consistently underperforming management teams every time - especially in a bad/tough business. This may be one of those really "special" situations where it works out but I think you are working very hard and swimming upstream here.
I don’t have a huge problem with your view. But every stock has a price, regardless of mgmt quality or biz model. I think 3.3x on my numbers is too cheap. Let’s see what happens in 6 months time
Nice post Plum. Do you have any updates on JAKK that might account for the recent price decline. Has anything fundamentally changed with the business or your thesis?
Yeah it’s a fair question… honestly think it’s more of the general market, small cap value has gotten absolutely destroyed this week. Many value focused investors I know are down ~10% or more in the past week or two, and I took a beating as well personally. Also could be converts selling down but I am not 100% on that. I realize that the price action is frustrating, but hopefully anyone involved has sized this so you can add lower. I am thinking of slowly getting more exposure here and more if it drops further.
Many thanks for the response. I appreciate the market has not been kind to your post (yet). I'll take comfort in knowing the overall Q3 catalyst and general re-rate is fundamentally unchanged and try to dollar cost down.
Is this really a Halloween reopening play? Halloween accounts about 20% of annual sales (or high 20s in Q3). The COVID delta for 2020 Halloween sales was only $20M. Halloween sales also have lower than corporates average gross margin. It appears that the company's weak sales had more to do with poor merchandising in the Toys segment (still selling Frozen 2 toys).
Thanks for the post. Cute doggie, btw.
Yes there was some lapping of frozen that was a headwind in 2020 so you are right, but obviously Halloween very important to the biz. Just a matter of perspective I guess.
Great post! Do you have any idea why CEO Berman has so few shares even though he's (supposedly) a co-founder? I've glanced through some older 10Ks and even in the oldest one I could find, from 1999, he has only 0.4% of the shares.
Thanks Jaap. I'm not familiar with ancient history here but I would guess he owned more initially but sold down periodically since 1999. However, he owns 540k shares outright, and he gets paid $3-4mm per year (of which some is tied to performance). So he should be reasonably aligned with the success of the business. Also I thought it was interesting that he gets a $10mm lump sum payment in the event that they sell the Company. A buyout is not part of my thesis at all, but I wouldn't be surprised if it happens at some point down the road. I believe they need approvals from key licensors, but if this could be done, would be a no-brainer acquisition target for Hasbro or Mattel given cross selling and cost synergy opportunities
That's the strange thing, even in 1999 he barely had shares, and that was just a few years after the company was founded. Oh well, I was just wondering. I agree he's reasonably well aligned now. There have been a few buyout offers over the past years, not sure why they didn't materialize, but sure seems like a possible scenario. Thanks!
Yeah there's some messy history around a past buyout offer from Oaktree which was rebuffed by the Company. Because they underperformed thereafter, the mgmt. team was heavily criticized back then and left a bad taste in people's mouths. But I don't think it's too relevant to my pitch. I'm glad you enjoyed the post, regardless!
Great write up. Any colour on issues getting stock on time for Halloween, Chinese manufactures jacking up prices asked and container rates hitting 20,000 USD. How much cost push on merchandise have your factored in ?
It’s a risk for sure. Freight cost inflation has come up in the past quarters too, and mgmt. controlled it well so far. I know it’s gotten worse so tbd on the impact (I think really difficult to estimate accurately and didn’t want to overcomplicate my math as I’ll be wrong anyway). Rather I think the conservatism in my projections helps offset any negative surprises here. But we’ll see
I don't think the transport risk washes out if it goes wrong. Higher transport costs on a 30% GM product (see financials) is a significant risk. The greater risk however is the extra time it is taking to deliver product with ships sitting at anchor waiting their turn for weeks offshore Long Beach. Halloween items hitting shelves on November 1st would be NO BUENO!
Magellan, was taken over for $1 plus debt owed to their main supplier after delays and management logistical mistakes one season caused GPS units to hit the shelves THE WEEK AFTER CHRISTMAS!
You should call up management and question transport costs and contingencies for potential delays.
Already asked, got a generic answer. It’s a fair point but they will never tell you in too granular a detail. Yes transport is a risk, and I think it’s part of the reason why the stock trades here. But I do think the market is freaking out too much over it. We will find out soon. I have positioned myself such that if the stock falls, I have flexibility to add more if the situation warrants it
yes. I think you are consersative on top line and pricing / so it should wash out. it is a concern Dollar Tree mentioned it last Q.