NEW YORK (CNN/Money) -
With a wave of its wand and the incantation of the spell "portfolioblowupus", Scholastic has made quick work in the past of anyone who would bet against the power of Harry Potter. But that doesn't mean the company is a very good investment.
Excitement over Saturday's release of the fifth Harry Potter book, "Harry Potter and the Order of the Phoenix," has reached a fever pitch and Scholastic, which owns the U.S. rights to the series, has seen its stock climb 37 percent from its March lows.
Not bad for a company that hit investors with a stunner of a warning back in February -- especially considering the fact that Harry Potter's popularity ain't exactly news. It's easy to make a snap judgment and say that all the good news is already out, and that this is a classic sell-the-news situation.
That's what people said when the series' fourth installment, "Harry Potter and the Goblet of Fire," was released back in July 2000. The first three books had been running at the top of at the New York Times best-seller list, until the Times decided to give more "mature" authors like Ed McBain a shot at getting their name in lights by creating a separate children's list.
Weighing in at 752 pages, the new book seemed way too fat to live up to the hype. Scholastic's stock had run up about 30 percent in the three months preceding the release, making it seem like a good time to bail.
It wasn't, of course. Harry blew past expectations, and Scholastic's stock flew, closing out the year 40 percent above where it was when "Goblet" was released. A similar situation could be brewing here, and with the end of the quarter coming up, the next several days could be particularly good for the stock.
Mutual funds send notes out to investors, along with their top holdings, at the end of each quarter. They like to put their best foot forward, and given the stock's run plus the Harry hype, gussying up the portfolio with a little Scholastic may seem like a fine idea to them. Such window-dressing, as it is called, can give a big bump to stocks.
Even so, Scholastic (SCHL: Research, Estimates) is the kind of stock that many professionals simply don't want to be involved with -- either as a long or a short.
"I like to at least be able to quantify when a stock is expensive and when it's cheap," said Brad Ruderman, managing partner at the Beverly Hills, Calif.-based hedge fund Ruderman Capital Partners. "You can't do that here -- at least with any rational kind of view."
We all know that "Phoenix" is going to be a big seller, but there's no real way of knowing how big it's going to be. There's no way of knowing what sort of demand it will spur for the first four books. Or games. Or plush dolls. Etc. It's like trying to predict the box office take for movies -- even supposed experts pretty much stink at it.
For longer-term investors, the problem with Scholastic is that it has become overly dependent on the Harry Potter franchise. If J.K. Rowling came down with a very bad case of writer's block, for instance, or got turned into a newt, the company's future revenues would be in trouble. Even without worrying over unforeseen events, there's the simple fact that Rowling says the series ends at book seven. And Scholastic may be left without anything up its sleeves.
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