Bearish Toy Story

If cash-strapped consumers postpone their holiday shopping until deal season, toy stocks might be less fun to play with in the short term.

Toy makers have been rallying hard with cyclical sectors leading the S&P 500 rally above 1,060. Since the mid-March bottom, industry leaders Mattel ( MAT - news - people ) and Hasbro ( HAS - news - people ) are up 74% and 36%, respectively. But the monopoly that bulls have had on toy stocks might be coming to an end.

Hasbro, the seller of popular games like Monopoly, Trivial Pursuit, Dungeons&Dragons, and Clue, has been riding high on Hollywood exposure. Second-quarter earnings for the Pawtucket, R.I.-based toy manufacturer were helped by this summer's blockbuster Transformers sequel. Hasbro shares a small percentage of movie ticket sales with Transformers distributor Paramount. In addition to the Transformers toy line, Hasbro markets Pokemon, G.I. Joe and NERF brands.

Hasbro saw sales climb 1% last quarter to $792.2 million, falling just short of analysts' expectations. Net income was $39.28 million, up from $37.49 million in the same year-ago period. Operating profits of $73.07 million rose to 9.2% of net sales, reflecting lower advertising costs and other expenses. But gross profit slipped slightly as Hasbro's cost of sales increased marginally.

Through the first half of 2009, Hasbro's net is down 21.2% compared with 2008. The company will report third-quarter earnings on Nov. 19.

After the success of the first live-action Transformers film in 2007, in addition to this past summer's mega-hit Transformers sequel, Hasbro, the second largest toy and board-game maker in the world, is clearly looking to expand its multimedia reach. In 2010, Hasbro and Discovery Communications ( DISCA - news - people ) will replace the Discovery Kids network with programming revolving around popular toys. Terms of the deal include Hasbro paying $300 million upfront and $125 million in royalties over the next four years to Discovery in exchange for a 50% stake in the joint venture.

Wells Fargo analyst Tim Conder thinks Walt Disney's ( DIS - news - people ) $4 billion acquisition of Marvel Entertainment ( MVL - news - people ) may hurt Hasbro. Conder noted that "it is highly likely that Disney will want to retain Marvel-related programming content for its own channels of distribution." The Marvel acquisition may withhold some of the toys the joint venture will be able to feature on the new network, potentially limiting back-end profit potential for Hasbro.

Hasbro is now bumping up against its 2009 highs, similarly to the furious rally off its lowest point of the year in March that culminated in early May. Hasbro may be battling two-pronged resistance as the Dow approaches 10,000 while its own shares test year-to-date highs.

Where Hasbro has been riding its recent foray into multimedia, Mattel, the world's largest toy maker by volume, has not had as much help from Hollywood. The El Segundo, Calif.-based toy producer saw a 19% second-quarter sales drop from $1.11 billion to $898.2 million, but cost-cutting measures did help Mattel realize an 82% jump in profits to $21.5 million.

Trading at 17.8 times earnings, compared with Hasbro's less expensive 15.2 multiple, Mattel may be gearing up for a leg down. With a relative strength index greater than 77, Mattel appears to be severely overbought. Currently priced near $19 per share, Mattel may retrace below its 20-day exponential moving average ($18.30) before searching out support at the Sept. 14 low of $17.91.

JAKKS Pacific ( JAKK - news - people ) trails by a large margin the impressive share price gains made by its two bigger brothers. Shares of JAKKS, currently trading around $14.50, are still down 29% in 2009 and are nowhere near the 52-week high of $27.12. JAKKS may not have as far to fall as its big brothers if toy makers break down.