Inevitably, after a major catastrophic
event occurs, many investors
try to guess what industry
or sector will directly benefit. The
direct beneficiary of the woes created
by the global credit crisis is the online
financial sector, and the global credit crisis
will permanently alter our daily lives, as
our access to real-time international business
and economic news and information
becomes a need instead of a luxury.
The demand to learn how to digest and
leverage financial information also goes
up as the volatility increases in the markets
and the returns generated by
conventional brokers go down.
Mortgages and home prices have
now been directly linked to have
a cause and effect on the stock
market, and vice versa. The
emerging market economies in
China, India, etc., have now
grown to the point where they
can have a positive and negative
impact on the U.S. market and
economy.
The brands of the big brokers
such as Merrill Lynch have
been severely damaged and are
probably beyond repair. If the
sovereign funds had not bailed
out Merrill and Citigroup, they would not
have likely survived. They may not be so
lucky next time. Even more troublesome
is the fact that many of these low-quality
subprime mortgages were packaged by
the big brokers and banks and then sold
to their clients. I can’t imagine why anyone
would want to be a long-term stockholder
or a client of Merrill Lynch, Citigroup or
any other financial institution that had to
be bailed out by a sovereign fund in order
to stay in business.
The narrow escapes by Merrill and
Citigroup and the significant losses suffered
by their clients who are holding
their packaged paper are analogous to
what happened with the aviation industry
in the 1950s and 1960s, when there was
an unusually high number of airline
crashes, resulting in a lot of fear and insecurity
about flying. In order to deal with
it, a record number of individuals paid
$1,000 or more—in 1960s dollars—to
learn how to fly. They wanted to be able
to land the plane in the event that the pilots
were incapacitated, and they wanted
to learn about airplanes and how they operated
so they could better understand
the risks they were taking when they
boarded a plane. Now that the markets
are going through a vicious correction
and we’re seeing the first extended bear
market since the 1980s, more people are
deciding to learn how to pilot their own
portfolios. Once educated, many of these
individuals will become clients of online
brokers. They will also become subscribers
to financial information.
INVESTOR EDUCATION
The biggest beneficiaries of the current
subprime crisis are those individuals
and businesses that provide education and
training in investing and trading. Robin
Dayne, the founder of RobinDayne.com,
has been a professional trading coach for
16 years. Her specialty is helping
traders deal with the critical mental
and psychological aspects of
trading. Since November 2007,
she has seen a sharp increase in
the demand for her services. According
to Nick Maturo, CEO
of TheRetirementSolution.com,
the average dollar value per investor
education buyer has increased
by 50% for its investment
tools and training division
during the first month of 2008.
Since the dotcom bubble
burst in 2000, over 500,000 investors
have paid for and have
graduated from stock-market education
courses, and the bulk of those
graduates paid between $5,000 and
$20,000 for their education. But when
one considers the amount of investors in
this country, it’s apparent that the industry
has only scratched the surface. Two
out of every three Americans now own
shares in publicly traded companies.
There are over 90 million investors alone
in the U.S. who hold mutual funds.
The leader of the stockmarket investor
education industry is Investools (NASDAQ:
SWIM). At the end of September 2007,
SWIM had 321,000 graduates. It has enjoyed
steady and uninterrupted growth
since 2002, when its shares were trading
below$1. Because of its leadership position,
its partnership with Yahoo, and its intense
television advertising campaign, Investools
shares are well positioned to continue to
outperform the stock market.
The only other public company that
participates in the securities trading education
industry is TheRetirementSolution.
com (OTC BB: TRES). In January
2008, TRES announced that it had acquired
Investment Tools & Training
LLC (ITT). ITT has several principals
who were previously affiliated with
SWIM and/or Edutrades, a private
company that is number two in the industry,
with over 120,000 graduates.
ITT has developed Investview, its stateof-
the-art courseware. It has
also adopted SWIM’s marketing
and advertising technique
of utilizing multiple channel
partners to assume the up-front
risk of marketing and advertising
costs and expenses. TRES
is led by its CEO, Nicholas
Maturo, the former CEO of
Edutrades. Under his tutelage,
Edutrades grew from $2 million
to $120 million and racked
up over 100,000 new customers
between 2002 and 2006.
ONLINE FINANCIAL INFORMATION
On Feb. 5, 2008, Bankrate (NASDAQ:
RATE) announced an annualized revenue
run rate of $100 million for the first time.
Who would have thought that a company
that was founded to be a free provider of
bank certificates of deposit and mortgage
rate information could have attained
such levels? In his customary quarterly
conference call, Bankrate’s CEO stated
that the company’s websites had record
visits during January 2008, and he increased
Bankrate’s guidance for sales and
earnings for 2008. Obviously, the global
financial mortgage crisis has had no negative
impact on Bankrate. The Federal
Reserve’s frequent ratcheting down of
the Fed funds and discount rate has most
likely helped Bankrate in accelerating its
growth in revenue and profit.
Record results will probably continue
to be the norm for Morningstar
(NASDAQ: MORN), which is primarily
in the business of providing information
that enables individuals, financial advisers,
and institutions to outperform the stock
market. MORN is also the leading
provider of ratings and information on
mutual funds. It is a full-service online financial
information provider, and because
it is the biggest online information
providers, it is probably in the best position
to benefit from the current situation.
TheStreet.com (NASDAQ: TSCM), a
leading independent producer of financial
news, ratings, and business and investment
content, is another one that is well
positioned to capitalize on those who are
dissatisfied with the performance of their
broker. It also has major ties to General
Electric’s (NYSE: GE) CNBC subsidiary
because one of its major shareholders is
Jim Cramer, the colorfulMadMoney host
on CNBC.
Interactive Data (NYSE: IDC) is a
subsidiary of London-based Pearson PLC
(NYSE: PSO), which is the publisher of
the daily newspaper Financial Times. IDC
provides historical securities pricing data
and quotes on 3.5 million securities to institutional
investors, financial websites,
and individual investors. IDC owns e-Signal,
RagingBull.com, Quote.com, and several
other Internet properties. Ties to their
parent make them an obvious global play.
TheRetirementSolution.com and Investools
both provide education and information.
ONLINE SPECIALTY BROKERS
As investors become educated and
more savvy, they will need the services of
specialty brokers. This is especially true
for those investors who learn how to employ
sophisticated options and portfolio
hedging strategies. There are two publicly
held online brokers who cater to these educated
investors: Options Express
(NASDAQ: OXPS) and, again, Investools,
via its ThinkorSwim subsidiary.
The shares of both SWIM and OXPS
have been bucking the recent trend on the
financials. The shares of Options Express
hit a five-year high on Dec. 27, 2007, and
shares of Investools hit their five year
high on Dec. 26, 2007.
There is a reason why the shares of
these two Chicago-based rivals are not
skipping a beat—both companies know
something that the other brokers don’t.
They know that an educated client is the
key to having and keeping a profitable
long-term client. The customer metrics
of the two specialty brokers point this
out. According to analyst George Grose
of American Capital Partners, both
SWIM and OXPS generate significantly
more revenue and profits per client than
the larger name-brand brokers such as
Etrade (NASDAQ: ETFC) and
Ameritrade (NASDAQ:
AMTD). Investool’s Thinkor-
Swim subsidiary ranked No. 1
out of all online brokers, with
an average of 170 trades per
year per client. Options Express
came in at a solid No. 2,
with its average client generating
41 trades per year. Ameritrade
and Etrade brought up
the rear, with their clients generating
an average of 10 to 12
trades per year.
Investools’ big advantage over the
other online brokers lies in its educational
platform, and Options Express is
fully aware that education is the key to
increasing client-trading frequency and
preservation of capital. Recently, Options
Express hired Paul Eppen as its
chief marketing officer, which is the
position he previously held at Devry, a
leading provider of for-profit education
services. Grose believes that the
investor education industry is still in
its infancy and that a good part of its
future growth could be driven by discount
and online brokerage firms,
which are seeking higher profits from
their client bases.
In my September 2007 EQUITIES
article, “From Supporting Role to Romantic
Lead,” I recommended Bankrate,
Interactive Data, TheStreet.com, and
Morningstar. The shares of each of
these online financial information
providers hit five-year highs during November
and December of 2007. In all
the years that I have been writing articles
and recommending stocks, I had never
had anything like this happen—four
picks from the same industry (and the
same article) all simultaneously marched
to five-year highs within 90 days. Looking
back, I discovered that every company
in the Online Financial Sector that
I had recommended in StockDiagnostics.
com’s OPS Newsletter in 2002 and
2003 had also gone up significantly—
four of the five appreciated by over
100%. Combine the two recommendation
lists, and I was nine for nine on my
recommendations.
Investools’ shares paid for a good portion
of my family’s living expenses between
2004 and 2007. We purchased
40,000 Investools’ shares for approximately
$6,000 (17 cents per share) in
2002. By 2004, its shares were above $2.
Between 2004 and 2007, our $6,000 investment
in Investools generated over
$100,000 of income for my family.
Investing in companies that are members
of the online financial sector provides
multiple once-in-a-lifetime investment
opportunities. Here
are the five main reasons
why:
• Cash-flow dynamics
are superb.
The online financial sector
is like no other when
it comes to generating
positive cash flow. All
subscribers pay up front
for subscription services.
Approximately
40% are willing to pay
for a year or more in advance.
There is no other
sector or industry that I
know of that enjoys
such an advantage. Even
your garbage collector
doesn’t send you a bill
until after he’s collected
your garbage.
• Client-retention rates are high.
Once individual investors get comfortable
with their providers, they are loathe
to make changes. Also, the
quality of customer service is
rarely an issue because all business
is conducted online.
• The sector is low-risk.
The business models for all of
the companies in this sector are
very similar to that of the publishing
industry, which is arguably
among the lowest-risk
industries to invest in since the
invention of the printing press.
How often do newspapers go
out of business? This is because
after the investment in
plant and equipment is made
the cost to support each additional
acquired customer is incrementally
lower.
• The sector grows and thrives on
increased volatility. The sector is the
only one that I know of in which the demand
for its products and services actually
increases in a bear market or a recession.
• Bad advice from brokers will
fuel growth. Name-brand brokers
have a long history of giving bad advice.
Many investors are going to find
out that they unknowingly purchased
subprime loan portfolios from their
broker that will soon be valued at 10
cents on the dollar. Those same brokers
were the ones who had 27 buy ratings
and no sells when Enron went out of
business. The brokers will continue to
suffer attrition, and the online financial
sector will grow unabated for the next
10 years.
I am recommending the shares of the
following companies in the online financial
sector. I predict that each could see
new 52-week highs in 2008.
I will continue to monitor this sector in
EQUITIES Magazine. I believe that this
sector will significantly outperform the
stock market for the next 10 years.
— By Michael Markowski
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