With the holiday shopping season about to boost into overdrive later this week, I decided to get an early read on the hottest toy trends at Amazon.com (Nasdaq: AMZN ) .
Regardless of your thoughts on Amazon's valuation -- lofty on an earnings basis but much more reasonable on a free cash flow scale -- the leading online retailer is a great resource for taking the pulse of where shoppers are spending their money. Amazon.com updates its best-seller list hourly, and that's free investing research ripe for the picking.
What I discovered in eyeing the hottest-selling playthings over the weekend was initially unsettling. Four of the five best-sellers in the e-tailer's toy and games category were Zhu Zhu battery-operated hamsters. The rest of the list is loaded with add-on Zhu Zhu accessories -- fun-house habitats, exercise wheels, and even cars -- that complete the fake -rodent experience.
Every season has its share of hot toys that find parents clawing at one another for the final item on a retailer's shelf or outbidding one another to ridiculous extremes on eBay (Nasdaq: EBAY ) .
It's different this time.
This hamster has its sights set on destroying Christmas.
This critter will eat you out of house and home
There are so many things wrong with the Zhu Zhu craze, it's hard to know where to begin.
As investors, let's start with the company that makes them. This isn't Mattel (NYSE: MAT ) or Hasbro (NYSE: HAS ) with their hands on this season's must-have toy. Cepia, a tiny St. Louis-based company with roughly three dozen employees between here and China, is the mastermind behind the Zhu Zhu Pets toy line.
Feel free to applaud Cepia's success, but since the company is privately held, it's not as if investors can ride the toy's coattails. At least investors could buy in during the 2007 holiday season, when JAKKS Pacific's (Nasdaq: JAKK ) EyeClops Bionic Eye sat atop Amazon's best-seller list for weeks.
It gets worse, though.
When the hamsters were available at Toys "R" Us and Wal-Mart Stores (NYSE: WMT ) this summer, they were selling for $8 to $10 apiece, and the accessories fetched between $10 and $20. The small toymaker is having a hard time arming retailers with reinforcements, so pitiful supply and unbelievable demand are combining to create cottage industries on Amazon and eBay.
The four hamsters on Amazon's best-seller list are being sold by third-party providers for nearly $70 each. Of course, the accessories are getting marked up as well. As of yesterday, a search for "Zhu Zhu" on eBay unearthed nearly 19,000 items. The completed auction prices were running about half the price of Amazon's, but still several times above their actual retail price.
See the problem? Even Cepia isn't making as much on these things as the resellers are. This also creates a problem for Mattel, Hasbro, and every other toymaker out there. If parents are budgeting to spend $100 in toys this season on a child, instead of spending $25 on a hamster and a fun house, they'll have to blow $100 in the aftermarket, and there won't be money left for anything else from the other toymakers. This is going to crush rival toymakers, regardless of how many sane shoppers sidestep the hysteria.
Retailers will also feel the pinch. The websites of Wal-Mart, Toys "R" Us, and Target (NYSE: TGT ) are fresh out of these critters, too. Even folks who placed preorders several weeks ago have had their requests cancelled. Toys "R" Us is promising a fresh in-store shipment in time for its Friday morning rush, but anyone hitting the sites of the major retailers are eventually going to make their way to Amazon and eBay -- the only two publicly traded companies that will truly profit from Zhu Zhu mania.
The audacity of rope-a-dope
There is a more sinister investing play, naturally. You can don Ebenezer Scrooge's robe and short the toymakers. You can even bet against the retailers.
The one caveat is that an Amazon best-seller list full of rodents may not necessarily be indicative of their actual appeal. Folks are hitting up Amazon and eBay because these are the only places they can find the hamsters at any price. A breakthrough toy is a top seller at all retailers, not just the ones serving as open marketplaces.
There's one more nugget for optimists to drop into their stockings. Cepia, rival toymakers, and retailers aren't cashing in on the premiums that panicky parents are paying. But what about the enterprising folks who have enough time on their hands to secure the hamsters and mark them according to market demand? At a time of double-digit unemployment and recessionary strife, the money that's leaving the pockets of those able to overpay for the motorized beasties is going into the pockets of people who may be out of work, or perhaps it's going to stay-at-home parents who will probably pour their profits right back into the economy.
So maybe this same Zhu Zhu that's frustrating holiday shoppers and surely denting the ability of Mattel and Hasbro to bounce back this year will be just the ticket to rekindle the fledgling economy. Zhu Zhu may be killing Christmas in one sense but saving it on an entirely different level.
Roll on, Chunk, Num Num, Pipsqueak, and Mr. Squiggles.