FOOL ON THE HILL: An Investment Opinion
A shortage of systems has stripped the Sony PlayStation 2 of its birthright as this season's hot toy. That creates an interesting scenario with other potential holiday homers now jockeying for position to be on top of wishlists everywhere.
Last month, component shortages forced Sony to scale back system shipments. Next week's stateside launch will be greeted with just 500,000 units. With only 100,000 new systems being added each week, it means that less than a million PlayStation 2 consoles will be available in time for the critical Thanksgiving weekend, which traditionally marks the start -- and the peak -- of the holiday shopping season.
Besides, most of the systems have already been spoken for.
But why should you care? If you don't know your Spyro from your Pikachu, why is this relevant to you as an investor? Well, even if you don't believe in Santa anymore -- even if you don't observe the Christmas holiday -- the toy industry comes alive this time of year, whether you dangle mistletoe or not.
We the financial media are often a predictable lot. Like clockwork you typically come across countless writings highlighting the mad toy scramble fueled by turkey leftover breakfasts the Friday after Thanksgiving. Through mid-December, columnists will flood you with the top-selling playthings and the publicly traded companies that make them. And, yes, of course, you are going to get hit with a few evergreen pieces on how the gift of kid-related stocks makes for an ideal stocking stuffer.
Well, toss your scripts into the bonfire because this year, believe it or not, things will be different. In an effort to stay one step ahead of the pack, I'm here to warn you that the holiday headlines are being bumped up a few weeks. It's all Sony's fault you know. But hear me out. This is how I think it will pan out. If I'm right, you'll get a kick when you wash this all down with eggnog -- and maybe make a penny or two along the way.
OK, on October 26, the mighty PlayStation 2 hits the market. Nintendo and Microsoft (Nasdaq: MSFT) will be out with the Game Cube and Xbox, respectively, next year. The specs on the 2001 machines -- particularly the Xbox -- are jaw-dropping. But since Sony has the largest established customer base, and the system is compatible with titles for the original PlayStation, there is no reason to believe that Sony will be dethroned anytime soon.
If you want a PlayStation 2, get in line. Get in the back of a long, long line. The demand has clearly outstripped supply. Popular online e-tailers such as Buy.com (Nasdaq: BUYX), eToys (Nasdaq: ETYS) and the new Toys "R" Us (NYSE: TOY) branded store at Amazon.com (NYSE: AMZN) are stocking the games and accessories, but they are not accepting system pre-orders. EBWorld.com expects to be able fill its pre-orders before the holiday season -- as long as the order was placed back in July!
You have to bricks-and-mortar it if you want one -- and just that very notion may hurt the online toyshops this season since it won't be the complete one-stop sleigh-filling experience the click niche once aspired to be.
Probably more of a concern will be the video game software makers. Shares of companies such as Electronic Arts (Nasdaq: ERTS), THQ (Nasdaq: THQI), and Activision (Nasdaq: ATVI) had been soaring this summer on PS2 hype. But who wants the games when you don't have the console? More salt in the wound is that diehard gamers have already given up buying titles for the existing machines because their feature days are numbered.
So, if I'm on target, two weeks from now you will see articles wondering about the near-term fate of the gamemakers. They'll even trash the already battered 3DO (Nasdaq: THDO) and Eidos (Nasdaq: EIDSY). The PS2 still expects to move 3 million consoles in the U.S. by the end of March. Unfortunately, out of season, teens with little in terms of disposable income might not find their parents so giving come January. Still, once the holiday rubble clears you will find some value columnists singing the praises of these companies at bargain-basement prices for the long run. They will be right, but it might get ugly before they merit consideration.
So, video games are out. What's in? Scooters of course. The best pure brand out there is Razor but the company is not publicly traded. The one to watch is volume leader Huffy (NYSE: HUF). I covered the company as a Daily Double back in August, and the bike and scooter maker has been topping projections since. The easy money seems to have already been made there, and the rampant availability of cheaper knockoffs seems to have limited the upside the same way Callaway Golf (NYSE: ELY) came to a halt as others joined the oversized golf club market.
And media, how we know you so well. The scootermania holiday headlines won't even have time to rub off on your fingers before you get hit with the safety concerns. It will make a market watcher miss the opportunity to buy into helmet and safety gear maker Bell Sports -- the company was acquired by a nonpublic firm two years ago.
So if video games are out and scooters are already making the rounds, who stands to win big this holiday season? Thanks to the power of the Internet and the informational wallop it packs, grass roots investing now means that the entire world is your lawn. You can stroll newsgroups to see what toys and games are in demand. You even have e-tailers providing cheat sheets.
Amazon.com lists its hottest selling toys, hourly. The findings might not appear meaty, yet. I mean, this afternoon the top-selling toy was a Simpsons action figure -- of Grampa! But bookmark the rank site anyway since it will be more productive once more holiday shoppers flock online for PS2 alternatives.
The demand for electro-gadgets in lieu of game systems might come from portable MP3 players. The heavy hitter there is the Nomad Jukebox from Creative Technology (Nasdaq: CREAF), which stores 100 hours of CD-quality music (and 2600 hours of spoken word content). S3 (Nasdaq: SIII) is another one to watch. S3 is the company behind the Diamond Rio line of MP3 players. Palm (Nasdaq: PALM) should also be a winner as the leader of palmtop organizers alongside Handspring (Nasdaq: HAND) and its popular Visor.
But despite all those bells and whistles, this suddenly rudderless shopping season might be just the tonic for ailing traditional toy juggernauts Mattel (NYSE: MAT) and Hasbro (NYSE: HAS). Sold out on one spectrum, technologically detached on the other, parents know they can always resort to Barbie, Hot Wheels, Mr. Potato Head, and Star Wars figures when all else fails.
This might also mean better times for Toys "R" Us, which botched online deliveries last year and has seen Wal-Mart (NYSE: WMT) strip it of the title of leading toy retailer in recent years. Teaming up with Amazon for the Internet store was a great move for both parties. Amazon is able to do away with costly fulfillment while Toys "R" Us takes a huge step to eradicate the perception that it can't succeed online after last year's public relations blunder. Besides, the coolest toy I've come across this season is the Animal Planet T-Rex with lifelike remote control functions. It's a Toys "R" Us exclusive.
So, that's how I think the holiday shopping season will play itself out. Arrive early. Remember who told you first.
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