Opportunity knocks in the strangest ways. Last month, my eldest son came back from school begging for some Yu-Gi-Oh trading cards.


It was all the rage in his third-grade classroom, with the same kind of feverish energy and hit-point resolve as Pokemon three years ago. As a parent, I try to give my son everything he needs but only half of what he wants. As it so happened, he was exceptionally good that week, so I caved in to his request.

Unsure of where to go, we pulled up to a nearby 7-Eleven (NYSE: SE). I'm not kidding when I tell you the small, hand-written sign on the window read, "We have Yu-Gi-Oh cards!" The cards were so rare and addictive that they were actually stocked behind the register. Wedged between the smokes and the blue magazines was a picked-over assortment of packs of Yu-Gi-Oh trading cards. I wasn't sure whether to have the cashier hand 'em over or put them in a brown paper bag.

Now's the part of the story where opportunity pounds the door with muscle-fisted fury, and I become hard of hearing. Why? The company licensing Yu-Gi-Oh stateside is none other than 4Kids Entertainment (NYSE: KDE). Right -- the Pokemon people. The stock was trading in the teens at this time, and I've got my son and a convenience store stating the obvious: 4Kids has caught lightning in a bottle. Again.

Did I listen? No. The stock has now graduated into the $20s, and it set a new 52-week high this past week. Yet it still isn't in my humble stock portfolio. I only have myself to blame because I've been a fan of 4Kids for years now. Three years ago, Bill Mann and I gave the stock the Dueling Fools treatment. I was the bull, arguing that the company was sowing the seeds of future Pokemonesque marketing deals.

At its peak, 4Kids had licensed the Pokemon name to more than 500 different companies outside of Asia. From vitamins to bed sheets to the popular trading-card game, it wedged its licensing foot into every merchandising door imaginable. Relationships like that aren't forgotten. Porting a Japanese property to the Western Hemisphere successfully gets you noticed.

So I missed out. My son. That dusty 7-Eleven store window. My 1999 reflection. It wasn't to be. But, you know something? I think this is just the beginning. Laugh if you want. Beat your chest and proclaim you will never own a company that substitutes the numeral 4 for the word "For." 2 bad. U lose. It has more going for it now than when the Pokemon money peaked two years ago. Let me explain. Let's go over the company's income statement for 2000.

4Kids Entertainment          2000
Revenue                      $88.0 million
Cost of Revenue              $0
Gross Profit                 $88.0 million
G&A Expenses                 $26.8 million
Depreciation/Amortization    $3.3 million
Operating Income             $57.9 million
Income Tax                   $25.7 million
Net Income                   $38.8 million
Diluted Weighted Shares      $13.1 million
Earnings per share           $2.96

That glazed doughnut sitting on the cost of revenue line may have caught your eye. See, 4Kids is a deal maker. It's a handshake maker. It just strikes the licensing deals, and then sits back to collect its cut of the royalties. In other words, 4Kids has produced 100% gross margins every single year.

That wouldn't be impressive if this were just another corporate fat cat, finding other ways to bleed the top line dry on the way down. But 4Kids is better than that. It's lean. The corporate overhead and depreciation writedowns were so insignificant two years ago that the company produced operating margins of 65.8%. After the tax bite, it still had $38.8 million left to report on the bottom line. That's net margins of 43.3%.

Microsoft (Nasdaq: MSFT) in its heyday? No way. This is Pikachu, baby. The company's so small -- there are just 13.7 million diluted shares outstanding right now -- that if it were to produce Pokemon numbers again, we would be talking about $2.83 per share in earnings.

Yu-Gi-Oh! is awfully popular right now. With the show's "It's time to duel!" battle cry serving as yet another reminder that I let this one slip through my fingers last month, despite my Duel with Bill three years ago, the anime-adventure series was the toast of the summer season. In July, it swept the 11 a.m. Saturday slot for boys in all age groups. It's an impressive feat when you consider that the show's on the relatively obscure WB Kids network.

Between the trading cards, the new DVD, and the merchandise  -- all shoo-ins to make most holiday wish lists, can Yu-Gi-Oh become the next $6 billion franchise, like Pokemon, when the property peaks in a year or two?

It doesn't need to. Keep in mind that not only was 4Kids profitable before and after the Pokemon craze, but it was also able to trade in that one-trick pony for a fleet of pretty horses. Viewed as an industry hit maker, 4Kids has been able to strike new deals, such as its television programming venture with Fox (NYSE: FOX). The company kicked off its Fox Box Saturday morning programming block last month, and ratings are up by 31% over last year's Fox Kids in-house efforts.

4Kids is able to scatter more seeds now, and on more favorable terms. So while the jury's still out on how the company will fare with Teenage Mutant Ninja Turtle revivals, shows like Cubix, or milking other Nintendo characters like Kirby and Mario, that's the point. It now has more pocket change to nickel-and-dime its profits higher than ever before. But don't turn to Wall Street for support, because not a single major brokerage has initiated profit estimates on the company. Could it be because 4Kids is so flush with cash that there's no investment-banking business worth generating?

If you like beautiful balance sheets, 4Kids has something 4U. Inventory? Nil. Remember, this is a dating service for marketable properties and merchandising opportunities. It's a pretty easy business to understand, with less room for accounting hocus-pocus. If you play the devil's advocate, you'd point out that this means the barriers to entry are about as low as your average 4Kids customer.

That's why its reputation and track record is so important, and you can't get a higher barrier to entry in terms of duplicating its licensing success. See, 4Kids isn't a flash in the pan. Chairman and CEO Al Kahn brought us the Cabbage Patch Kids craze. Then it was Pokemon. Now it's Yu-Gi-Oh. You know what happens when you string enough one-hit wonders along? You have a greatest hits collection.

But getting back to the company's come-hither balance sheet. 4Kids has no debt and nearly $7 a share in cash and short-term investments. Back that out of the company's share price, and it's fetching just six times what it earned two years ago, on an enterprise value basis.

With Yu-Gi-Oh leading the charge, do you care to argue otherwise? Convenience store windows don't lie.

Rick Aristotle Munarriz bought his son two packs of Yu-Gi-Oh trading cards last month. Kids at his son's school have gone on to trade the cards for everything from lunch money to lunch. Illegal legal tender? Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.