Newsletter

September Profile - StockGroup Information Systems

September 6, 2002
Volume V, Issue 67
Email : info@otcjournal.com
URL : http://www.otcjournal.com

To OTC Journal Members:

On November 24, 1859, Naturalist Charles Darwin published an abstract which would go down in history as the definitive work on theories of evolution. Entitled "On the Origin of Species by Means of Natural Selection, or The Preservation of Favorured Races in the Struggle For Life", the first edition sold out immediately. By 1872 Darwin had published six more editions.

According to Darwin's theory of Natural Selection, competition between individuals of a single species within a single population allowed the strongest to survive and pass advantageous traits on to future generations. Individuals with less competitive traits gradually disappeared from populations.

Technology companies in today's environment are experiencing the full wrath of Darwin's theories. The strong are maximizing their competitive traits and mutating into stronger business models which will grow and prosper during the next technology boom. The weak are gradually disappearing from the population. 863 software companies have closed their doors this year alone.

Natural selection has been particularly cruel in the dot-com arena. Wall Street's appetite to finance unproven dot-com business models led to an excess supply of capital for the weak. Many within the species fed on this temporary supply, but were ultimately poorly equipped to compete. They are rapidly disappearing from the population as they could not longer compete for the far less abundant supplies of capital and business.

However, in the financial information internet services arena, several have mutated their business models, developed more competitive traits, and prospered. Those with the courage to invest at the bottom have experienced 300% to 400% returns over the past year. Here are three specific examples:
 

Pictured across the page are three information service internet companies: MarketWatch.com (NASDAQ: MKTW), Hoovers (NASDAQ: HOOV), and the TheStreet.com (NASDAQ: TSCM).

All three have appreciated 300% to 400% off their lows over the last twelve months. Only one of the three was profitable in the June quarter. Each is in the financially related internet content business. Each has evolved its business model to meet the requirements of a highly competitive environment. To paraphrase Mark Twain: "The reports of their death were greatly exaggerated".

In our July 13th edition we indicated we would be focusing most of our attention on microcaps and good old fashioned penny stocks until the Bear Market has run its course.

In keeping with that theme, we have identified a beaten down internet company in the financially related content business which we believe is poised to repeat the performance of the companies pictured above. This company has mutated its business model to fit the changing times, and is poised for profits in future quarters. The stock is so beaten down that surging volume could drive the stock up rapidly.

We wanted to be the first to bring you the information about this dramatic 18 month turn around story. For your consideration: our new profile:
 

September Profile: StockGroup Information Systems, Inc.
  • Stock Listing: OTC BB: SWEB
  • Estimated Shares Issued and Outstanding: 15.8 million
  • Estimated Public Float: 9.5 Million
  • Last Closing Price: $.19
  • Market Capitalization: $3 Million
  • 52 High and Low: $.45 x $.095
  • Corporate Web Site: www.stockgroup.com
We have been following Stockgroup and been friendly with management since the summer of 1999. The company's original mission was to develop and deploy the premier destination web site for information on small and microcap companies in North America.

With an advertising budget in hand, they launched an ambitious and comprehensive internet community at www.smallcapcenter.com. Management felt advertising revenues combined with contemplated premium subscription services would yield a profitable business model. Like some many other dot-coms, they were wrong and unable to generate adequate revenues to sustain growth and yield profits.

Rather than close up shop and disappear into the night like most of their brethren, management realized there was a potentially profitable business model which could be attained by evolving into a new company and leveraging their existing information technology for the benefit corporate customers.

Over the past 18 months StockGroup has made a major transition. They determined their $35 million investment could yield returns by focusing on new products they can sell to corporate clients in the form of reoccurring licensing fees and ongoing service contracts.

We believe this evolution has not been reflected in the price of their stock. We wanted our members to be first to learn the details. Here is a breakdown of their various revenue streams:


 

Financial Tools Licensing

StockGroup invested years and a substantial amount of capital building internet related financial tools for their investment communities. For example, they provide private label portfolios, research databases, technical analysis tools, and charting systems. Thirty different software applications have been developed.

Over the last 18 months the company has uncovered an exciting new source of business. Selling those already developed resources to other companies who need to provide label financial content for their own web sites has proven to be an excellent avenue for expansion. Companies like American Express, Citigrup, and NY Life have discovered they save 70% to 80% on the costs involved by simply obtaining the software directly from StockGroup as opposed to doing it in-house.

Stockgroup has successfully leveraged its existing infrastructure to provide turn key solutions for a monthly fee to other companies. Overhead does not increase as the customer base builds, resulting in greater future profit potential.

When you visit your favorite bank, credit card, or financial web site you might be surprised to learn that StockGroup Information Services is actually providing the financial tools you are using. A few of their client companies include the following:

  • American Express
  • CitiGroup
  • Brokerage America
  • Conseco
  • Safeway
  • Freedom Publishing (publishes about 50 newspapers)
  • Mellon Financial
  • Dupont
  • NY Life
  • Price Waterhouse Coopers International
IntegratIR Product

Recent changes in SEC regulatory policy require more easily available disclosure from public companies. Nearly all public companies maintain a web site with information which is readily available for shareholders or potential investors.

Earlier this year StockGroup rolled out a revolutionary new product. IntegratIR, found at http://www.integratir.com/ is a turn key solution for public companies to provide full disclosure on their corporate web site and a variety of tools they might wish to make available, i.e. historical stock prices, charts, press releases, etc.

This service is considerably less expensive than having your own in-house IT department just to maintain your corporate web site. Features can be added on an a la carte basis. Monthly costs can run as little as $300, or as high as $2,000 to the client company.

The commercial introduction of this product has been so successful that StockGroup already has over 100 public company customers paying a monthly fee. Some notables include:

  • Intrawest
  • Marsh & Mclennan
  • BCE Emergis
  • Pittsburg Paint
  • QLT Inc.
  • Dupont
The market for this product is huge. As this recession drags on companies look for ways to cut costs while having to adhere to increased regulatory disclosure regulations.

There are nearly 16,500 public companies in the US markets alone. It is reasonable to assume StockGroup has only penetrated 1.5% of the potential market, and this product could fuel dramatic growth with a recurring revenue stream.
 

Acquisitions

As mentioned above, StockGroup's original mission was to develop the premier destination portal for information on small and microcap stocks. They achieved that goal in www.smallcapcenter.com. The site generated consistent revenues, but not enough to justify a business model for a public company.

Stiff competition came from www.stockhouse.com, the other premier destination site in North America for information on microcap stocks. Stockhouse to this day generates 50 million page views per month, and also generates a consistent revenue stream from advertising.

On June 20th StockGroup announced it had acquired all the assets of Stockhouse, thereby combining the two into one of the largest internet financial services companies in existence as measured by traffic and infrastructure.

StockGroup bought StockHouse in exchange for 2.2 million shares of newly issued, restricted stock, or about $450,000 in value. Nearly $24 million had been invested in the development of Stockhouse. Stockgroup immediately pared down the expenses considerably by getting rid of duplicate infrastructure, and this division is now break-even. It is anticipated these two sites will merge into one at some point in the future.
 

Financial Condition

StockGroup has been cash flow positive two out of the last four quarters. Through the six month period ending in June, the company earned $.02 per share. However, during that time period the company had a one time gain associated with the restructuring of a convertible note which yielded $.09 per share in profits.

The balance sheet shows a company with slightly negative equity, but is skewed by a $1.45 million in debt which converts to stock at $.50 per share. Therefore, based on today's closing price, this debt holder needs to see the stock appreciate 280% before this note can be converted.

Currently the company's annual sales are running at about $2 million. The June quarterly numbers do not reflect the StockHouse acquisition. Therefore, we are expecting sales to ramp up dramatically once we get past the seasonally slow summer quarter. Investors should look for growth to accelerate in the fourth quarter as advertising revenues and new business kick in. Infrastructure is so efficient the company needs only to achieve about $2.80 million in annual sales to make money.

Management informs us they expect to be cash flow positive from the 4th quarter on, and expect report real earnings per share in 2003 based on current business expansion.
 

Conclusion

MarketWatch, Hoovers, and TheStreet.com each have appreciated 300% to 400% over the past year. The stocks had simply dropped to a point where the market was willing to admit they were undervalued.

At today's closing price the market is only valuing StockGroup Information Services at $3 million. For a public company with a viable business model this is laughable.

The StockGroup Financial Services business model has evolved. The company is more akin to a utility than a dot-com at this time. Just like a phone company or a cable company that has finished building its systems, adding more customers generates more profits.

All told the sum of the parts is probably worth $5 to $6 million, particularly if the company can maintain a cash flow positive status. Therefore, we view this stock as undervalued as the sum of its parts are probably worth more than the whole based on today's market price.

We believe there is an easy double in the stock for investors with a six to eighteen month time horizon. Additional evidence of accelerating growth could cause us to revise our views upward. We are one of the first to identify the transformation that is happening at this company. This gives our members a competitive advantage.

The stock is thinly traded, so it is critical you trade intelligently. Investors should own this stock no higher than $.22. If it gaps open or trades significantly higher in the near term, wait a few days. Use a limit order.

Based on conversations with management we believe there is a strong possibility for substantive corporate events in the near term. We wanted you to have this stock on your radar screen ahead of pending developments, giving you the competitive advantage.


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