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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:
Profile: StockGroup Information Systems, Inc.
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.
Stock Listing: OTC BB: SWEB
Estimated Shares Issued and Outstanding:
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
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
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
Information Services is actually providing the financial tools you
are using. A few of their client companies include the following:
Freedom Publishing (publishes about
Price Waterhouse Coopers International
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
company customers paying a monthly fee. Some notables include:
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.
Marsh & Mclennan
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.
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.
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.
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.
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
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
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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