The Top Stock Picks From the Harry Potter Franchise - TheStreet

The most pre-ordered product at Amazon.com is the latest Harry Potter book, written by J.K. Rowling, whose books have sold more than 325 million copies.

This latest book in the series about the young wizard is so popular that it's been under guard at a secret warehouse, although it has leaked out onto the Internet despite security precautions rivaling those of Fort Knox.

Rowling wrote her first book as a single mother receiving government subsidies and became the second richest female entertainer in the world after Oprah, and the first person to become a billionaire from writing books.

The Harry Potter phenomenon is a worldwide one that hits all age groups and both sexes and has created a $10 billion industry of books, dolls, games and even glasses and watches -- it's such a mini-industry of its own that you can plausibly build a portfolio of stocks to catch a little magic from this pubescent warlock.

And that's what we've done: the

Harry Potter Stock Index

at Stockpickr.

The Potter books are published in the U.S. by

Scholastic

(SCHL) - Get Report

, which specializes in children's and educational book publishing. The stock has a

price-to-earnings ratio of 25.4 and a PEG of 2.02. Scholastic shows up in the portfolio of the

Royce Opportunity Fund

(RYPNX), which has generated an average return of 15.4% per year for the last five years.

But, that said, I wouldn't go with Scholastic here.

Everyone knows the bump that Harry Potter provides to Scholastic -- he gives a one-time $1-per-share-in-earnings jump, give or take.

Fine and well, but what have you done for me lately?

The key with any "Harry Potter" investment is to find one where you have a way out if your initial premise doesn't pay off. Is the stock cheap anyway? Does it have other growth prospects? Is it an acquisition target? Are there other good investors?

Scholastic might be a one-hit wonder -- the jury is still out.

Although I believe all the stocks on the list that we compiled are interesting, I like these three most of all.

Time Warner

(TWX)

-- the Harry Potter motion pictures are made by Warner Brothers, a subsidiary of Time Warner, the large entertainment conglomerate. The stock has a P/E of 13.5, a P/E/growth ratio of 1.5 and a yield of 1.1%.

Time Warner is one of the stocks owned by

Carl Icahn

, the famous corporate raider. Icahn also owns another entertainment company,

Lions Gate Entertainment

(LGF)

, which produces movies and TV shows. This stock has a P/E of 45.6 and a price-to-sales ratio of 1.36. Icahn also owns

Motorola

( MOT), which has a P/E of 16, a PEG of 7.75, and a yield of 1.1%.

Time Warner is trading at just nine times EBITDA and there's the possibility that if it breaks into pieces (spinning off AOL and the cable company) that it can trade for a much higher multiple. For one thing, AOL will probably trade at 20 times EBITDA. And the cable company can trade anywhere from 11 to 15 times EBITDA.

I also like

Hasbro

(HAS) - Get Report

. Hasbro makes the Harry Potter trading cards (I went out and bought some for myself). They are not like the trading cards form my youth. They've got that feature that if you move them a little the picture changes. But that's not important -- they may or may not be a hit but I don't care. Hasbro is cheap anyway. Here's what I like.

  • Hasbro isn't just a Harry Potter play; it also is involved with the Transformers movie, which already has brought in $220 million at the box office.
  • Hasbro trades for just eight times EBITDA and has $200 million net cash in the bank. An activist can easily get in there and tell the company to lever up and buy back shares. Or just sell themselves.
  • Hasbro counts one of my favorite hedge funds, Renaissance Technologies, as an investor.

My guess is Hasbro will get acquired within six months, before we even know the full effect of Harry Potter on its bottom line.

And, finally, I like

Electronic Arts

( ERTS), which is making the Harry Potter electronic video games.

Electronic Arts has $3 billion in cash with no debt and a promising new CEO who just broke the company into four divisions and is determined to reenergize its product line -- he was previously with the company and has come back after a stint at Elevation Partners.

It has almost 80% growth estimated despite a forward P/E of only 30. If Harry Potter takes off (for any of these stocks actually), it's a homerun.

But even it doesn't, it's a solid investment anyway.

The Potter Index, as plotted in the chart below, has been outperforming the

Dow

this year.

For the rest of the stocks that offer plays on the spell Harry Potter casts over consumers, including

Coca Cola

(KO) - Get Report

and even

Fossil

(FOSL) - Get Report

, check out the

Harry Potter Stock Index

on Stockpickr.com.

Want more? Check out TheStreet.com TV video.James digs deep into the Harry Potter books.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs a fund of hedge funds. He is also a weekly columnist for

The Financial Times

and the author of

Trade Like a Hedge Fund

,

Trade Like Warren Buffett

and

SuperCa$h

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

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