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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Leap Out of LeapFrog Stock Before You Get Cooked

Stocks in this article: LF AMZN GOOG MSFT AAPL WMT BBRY LXK DIS MAT

NEW YORK (TheStreet) -- LeapFrog (LF) is a fantastic company, but you should avoid its stock, which has become an earnings trap. The situation is so dire that I may sell short the stock depending on the price action after the company reports earnings on May 5.

At first glance, the stock might appear attractive. After all, this company has a well-known brand name, makes quality, feel-good products for children and provides fantastic service. The stock has a low trailing price-to-earnings ratio and no debt. What's not to love? LF Chart

The company's primary revenue driver is a child's tablet that is facing greater price competition from Amazon's (AMZN) Kindle, Google (GOOG) Android-based tablets, and a coming wave of Microsoft (MSFT) tablets. Apple (AAPL) dominates the premium tablet market, and LeapFrog is stuck in the middle.

Child-proof Android-based tablets are on sale at Walmart's (WMT) Sam's Club for less than $140. If Apple enters the children's tablet market, it's game over for LeapFrog. Even if Apple isn't successful, a press release with a Cupertino, Calif. datline is likely to cause LeapFrog shares to fall 20% or more within days.

The functionality and speed of tablets at every price point continues to improve, creating an arms race that is unwinnable for LeapFrog. Adding to the challenge is a growing army of app developers focused on creating the best and lowest-priced content they can. As of LeapFrog's latest annual filing, less than 50 app developers create content for a total of about 1,200-1,300 titles available for the cmopany's various offerings.

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