Avoiding Genius Brands International Is a No-Brainer

There are two ways to look at Genius Brands International (NASDAQ:GNUS), depending on your focus. Short term, something pretty remarkable happened when GNUS stock shot up between May 4 and June 3, from 33 cents per share to $7.93.  The company — which produces videos, music and books for kids, and includes the Kartoon Channel — looked to be benefiting in part from Covid-19 forcing kids to stay inside.

An image of two young girls looking at a tablet and smiling while an adult reads in the background.
Source: Syda Productions/ShutterStock.com

Yet value investors who, let’s say, bought in June 2016 wouldn’t exactly call $7.93 a giddy peak; in fact the stock dropped 21 cents per share over those four years. Fast forward to the end of August, and almost all the June gains are gone, with GNUS lumbering at around $1.18.

The technical term for this kind of gyration, as often used on Wall Street, is “Huh?”

Legal Troubles and Stock Bubbles

What’s worse, the Schall Law Firm announced on Aug. 25 that it filed a class action lawsuit against Genius Brands for alleged manipulative or deceptive practices and insider trading. Two days later came a similar suit by Bronstein, Gewirtz & Grossman, LLC.

While those actions on behalf of shareholders work their way through the legal system, GNUS stock, even when viewed independent of those challenges, hasn’t proven itself worthy of a serious investor’s money.

That one-month rocket ship in May, while mightily impressive, appears to have splashed down for good. Hyperbole from Chairman and CEO Andy Heyward fueled investor enthusiasm when he announced Kartoon Channel’s launch. In a May 13 shareholder letter, he invoked the mighty Netflix (NASDAQ:NFLX) when called his app-based property a “Netflix for kids.” Then came some slick verbal terpsichore:  “[The Kartoon Channel] is a pure cartoon play, with no ‘natural predators,’ and [is] what one of our board members described as an ‘economic vaccine for COVID-19.’”

“Netflix.” “No natural predators.” The words “vaccine” and “Covid-19” right next to each other. No wonder investors fell all over themselves to buy, buy, buy.

GNUS Stock: A Kartoon-ish Katastophe?

Yet the company’s slide since June reflects, besides the lawsuit troubles, a troubling Q2 earnings report. GNUS reported a net loss of $4.88 per share, compared with a 16 cent loss in Q2 2019. That’s a 30-fold increase, year over year. The Q2 news also reveals, in hindsight, stock buyers abandoning the sketchy speculation that Covid-contained kids would lean heavily into Genius Brand content in the fall.

Really? Well, then: Ask teachers more than ready to dish out the homework via Zoom (NASDAQ:ZM) how much spare time they think students will have for the video adventures of Rainbow Rangers.

As for how much time you, dear investor, should devote to GNUS stock, the answer we proffer is none. No matter the merit of the charges levied against the company, “multiple lawsuits” carries a dangerous dose of investor radioactivity.

No Gain, Your Pain

Nothing in Genius International’s history as a public company suggests that it’s worthy of a value investor’s serious consideration. Buy-and-hold here might as well be buy-and-don’t-hold your breath. In the last five years, the stock has plummeted 80%. It’s making some gains today on news that it has acquired two more cartoons — one featuring Sonic the Hedgehog and another featuring Pac-Man. But these are unlikely to be game-changers.

Feel like popping those champagne corks just yet? Even a sugary soda from some off-brand drink company would be too extravagant for a toast to Genius International.

So, buy? Or don’t buy?

Don’t buy. Definitely. You don’t have to be a genius to figure this one out.

As of this writing, Lou Carlozo did not hold a position in any of the aforementioned securities.

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