Throw This Stock Away

I just got a visit from the Ghost of Christmas Present, and boy, was he mad. A hot toy is threatening to dash toymakers' hopes this season, leaving nothing but coal in their shareholders' stockings.

I'm no Ebenezer Scrooge. I'm only here to warn you about a publicly traded company that may be bumping into some turbulence during its most seasonally potent quarter. Nor is my heart three sizes too small: I don't knock a stock unless I have three perfectly capable replacements for your portfolio.

So who gets tossed out like an old fruitcake this week? Come on down, Mattel (NYSE: MAT  ) .

C'mon, Barbie, let's go party
Mattel shareholders might think they smell a rat, but it's actually a hamster. The hot toy this holiday season is the Zhu Zhu hamster, the hard-to-find battery-operated rodents that are selling for several times above their $8-$10 retail price on auction sites and third-party marketplaces.

Every year has its Tickle Me Elmo, Pikachu, or Furby that sends parents on mad scrambles. Unlike Mattel's Elmo, Zhu Zhu critters are made by a small St. Louis-based company called Cepia.

But wait -- the story gets worse.

Tickle Me Elmo and Furby dolls were self-contained gifts, but Zhu Zhu hamsters are part of a complete ecosystem. In fact, any of the four hamsters is a dud on its own. Mr. Squiggles, Pipsqueek, Chunk, and Num Nums really get going when owners buy exercise wheels, funhouse habitats, and car garages as accessories. In short, this craze may be enough to consume entire toy-buying budgets in some homes.

Then again, it's not as if the Ghost of Christmas Past has been kind to Mattel. This is the same company that found itself apologizing to China after importing toys coated in deliciously bright shades of toxic lead paint. Smaller toymakers, including RC2 (Nasdaq: RCRC  ) , were also cited in incidents resulting from paint outsourcing, but Mattel became the poster child.

Mattel may be shaking the recall stigma, but it's still no market darling. Revenue fell by 8% in its latest quarter, and earnings also clocked in lower.

The longer view is also problematic. The Ghost of Christmas Future doesn't see a whole lot of conventional playthings under the tree. Instead of Barbie dolls, Hot Wheels play sets, and Blokus board games, kids these days are playing apps on their smartphones, downloading digital games onto their video game consoles, or diving into role-playing games on social networks. Mattel's Fisher-Price and American Girl may have a firm grip on toddlers and tween girls, but those are slippery fingers wrapped around an unsure future.

Traditionalists may cringe, but am I wrong? Mattel is rubbing all three ghosts the wrong way.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

• Hasbro (NYSE: HAS  ) : I may as well start with Mattel's biggest rival. Hasbro's wares will also be shipwrecked on the Island of Misfit Toys this season, but at least it's doing relatively better. Unlike Mattel, Hasbro grew its earnings this past quarter. In a poll following both companies, three times as many readers preferred Hasbro as an investment over Mattel. I have to agree. Hasbro is also trading at a lower earnings multiple -- with a P/E of 13.3 versus 16.5 for Mattel -- based on this year's projected profitability. The valuation disparity goes away when we look at next year's bottom-line targets, but I am woefully suspicious of analysts who see Mattel bouncing back next year.
• Apple (Nasdaq: AAPL  ) : Between MacBooks, iPods, and iPhones, this is the company making the big-ticket items that kids want these days. Don't let the sticker price fool you: This isn't all gadgetry for the rich kids. Apple is also playing limbo with what consumers expect to play for diversions. Most of the games available through its App Store for iPhone and iPod touch owners are either free or priced at a rock-bottom $0.99 each. This may be a bigger near-term threat to Microsoft (Nasdaq: MSFT  ) and its video-game counterparts, but the same company that blew up pricing in the music and video industries is now reinventing the value proposition of amusing time-killers.
• Amazon.com (Nasdaq: AMZN  ) : Wal-Mart Stores (NYSE: WMT  ) overtook Toys "R" Us years ago to become the country's largest toy seller. If you don't buy into my theory that the toy industry is in for a world of hurt, why bet on just one company when you can own Wal-Mart and profit regardless of who has the hot holiday toy next year? Well, I like Amazon over Wal-Mart for that play, because it's growing a lot faster than Sam Walton's chain is. It's also profiting from speculators, who are selling Zhu Zhu hamsters for nearly $70 apiece through its marketplace. Wal-Mart doesn't have that kind of third-party platform in place.

Sorry, Mattel. It's time to call the Ghostbusters.