onlinefinancialsector.com

As the smoke clears from the still burning global credit crisis it has become increasingly apparent that the Online Financial Sector is the biggest direct beneficiary of the fallout.  Since September of 2007, there has been a significant and permanent transition for this Sector.  Why?

·        CNBC’s viewership is up 80% since September.  Up until then its growth had been stagnant since the dot com bubble burst in 2000.  CNBC’s viewership skyrocketed upward despite the fact that they were competing for viewers against a brand new formidable competitor, The Fox Business Channel.  Fox is also not having any problems in attracting viewers and advertisers to its channel.

·        The volatility of the markets due to the sub prime crisis bodes well for all businesses that provide financial information as the demand for financial information goes up during crises and recessions.  The demand to learn about how to digest and leverage financial information also goes up as the volatility goes up in the markets and the returns generated by conventional brokers go down.

Inevitably after a major catastrophic event occurs many investors try to guess as to what industry or sector will directly benefit.  After 911 it was the homeland security and defense stocks.  I believe that when everyone looks back a year from now it will be obvious that the direct beneficiary of the woes created by the global credit crisis will be the Online Financial Sector.  I also believe that everyone will agree that similar to what happened after 911, the global credit crisis will have permanently altered our daily lives as our access to real time global business and economic news and information becomes a need instead of a luxury.       

Investors are now more insecure than ever

As the economy and the markets become more volatile deep levels of investor insecurities are being uprooted that have been buried within the investment public.  The recent subprime credit crisis has been a major catalyst in uprooting these deeply imbedded insecurities especially because (1) mortgages and home prices have now been directly linked to have a cause and effect on the stock market and vice versa (2) the emerging market economies in China, India, etc, have now grown to the point where they can have positive and negative impact on the US stock market and economy and (3) the brands of the big brokers such as Merrill Lynch have been severely damaged and are probably beyond repair. 

The big reason why the brands of big brokers and banks could be in danger is because many Merrill and Citigroup clients and shareholders had to have a sigh of relief after they just narrowly escaped being involved in a major accident (if the Sovereign funds had not bailed them out they both would not have likely survived) and that 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 financial institution that had to be bailed out by a Sovereign fund in order to stay in business. 

The narrow escapes by Merrill Lynch and Citigroup and the significant losses that have been 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 were a lot of airline crashes which resulted in a lot of fear and insecurity about flying.  In order to deal with the fear and insecurity of flying back then, a record number of individuals paid a thousand dollars (in 1960 dollars) or more to learn how to fly.  I know this because my father was a flight instructor.  They (1) wanted to be able to land the plane in the event that the pilots were incapacitated and (2) they wanted to learn about airplanes and how they operated so that they could better understand the risks that they were taking when they boarded a plane. 

The extended bull market has kept these fears and insecurities buried.  Now that the markets are going through a vicious correction and the first extended bear market since the 1980s these fears are resurfacing.  The fear will not abate until the end of 2009 because that is when the last big wave of mortgages are scheduled to reset.  The result will be more and more people 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 accelerating demand for education on securities trading, which is being driven by the onset of the current subprime crisis, are those individuals and businesses, which provide training and education services on investing and trading.  Robin Dayne, who is the founder of RobinDayne.com, has been a professional trading coach for the past 16 years.  Her specialty is in helping traders deal with the critical mental and psychological aspects of trading.  Since November of 2007, she has seen a sharp increase in the demand for her services.  According to Nick Maturo, the CEO of TheRetirementSolution.com, Inc., (http://www.theretirementsolution.com/)  the average dollar value per investor education buyer has increased by 50% for its Investment Tools & Training division during the first month of 2008.

What is happening to the Securities Trading Education Industry is analogous to what happened to the pilot education industry in the 1950s and 1960s.  Since the dotcom bubble burst in 2000, over 500,000 investors have paid for and have graduated from stock market education courses.  The bulk of those graduates paid between $5,000 and $20,000 for their education.  Two out of every three Americans now own shares in publicly traded companies.  There are over 90 million investors alone in the USA who hold mutual funds.  With only 500,000 paid participants the Investor Education Industry has yet to barely even scratch the surface. 

The leader of the stock market investor education industry is Investools (NASDAQ:SWIM).  At the end of September 2007, SWIM had 321,000 graduates and it has enjoyed steady and uninterrupted growth since 2002 when its shares were trading below $1.00.  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 (OTCBB: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, (www.investview.com) which is its state of 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 who was the former CEO of Edutrades.  Under Maturo’s tutelage Edutrades grew from $2 million to $120 million and racked up over 100,000 new customers between 2002 and 2006.  Given Maturo’s experience and track record in the investor education industry, TRES is well positioned to quickly garner significant market share.  

Online Financial Information

The Online Financial Information providers benefit from the increased market and economic volatility because investors demand more real time information in volatile times.  On February 5, 2008, Bankrate (NASDAQ:RATE) announced an annualized revenue run rate of $100 million for the first time ever.  Who would have thought that a company that was founded to be a free provider of bank Certificate of Deposit and mortgage rate information could have attained such levels?  In his customary quarterly conference call Bankrate’s CEO stated that company’s web sites had record visits during January of 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 advisors and institutions to outperform the stock markets.  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 of all of the On Line Information providers it is probably in the best position to benefit from the woes of the big brokers and banks including Merrill Lynch and Citigroup, etc. 

TheStreet.com (NASDAQ:TSCM:), a leading independent producer of financial news and ratings, business and investment content is another one that is also 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 James Cramer, the colorful “Mad Money” host on CNBC. 

Interactive Data (NYSE:IDC) is a subsidiary of London based Pearson PLC (NYSE:PSO), which is the publisher of the Financial Times daily newspaper.  Interactive provides historical securities pricing data and quotes on 3.5 million securities to institutional investors, financial web sites and to individual investors.  Interactive owns e-Signal, RagingBull.com, Quote.com and several other Internet properties.  Ties to their parent make them an obvious global play.  

TheRetirementSolution.com (OTCBB:TRES) is one of two, the other one is Investools, that provide both education and information. Through its recently acquired Razor Data subsidiary, TRES provides live data feeds, real time quotes and charting capabilities to its subscriber base.  TRES also provides recommended stock portfolios to its subscribers that are based on StockDiagnostics.com’s proprietary cash flow metrics.  The portfolios, which have between 50 and 100 stocks in each of them provide a viable alternative to mutual fund investors.  The three portfolios have a track record and each of them has significantly outperformed all of the major market indices and a majority of all mutual funds since they were established in 2005.

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.  They are Options Express (NASDAQ:OXPS) and Investools (NASDAQ:SWIM) 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 December 27, 2007 and shares of Investools hit their five year high on December 26, 2007.   

There is a reason why the shares of these two Chicago based rivals are not skipping a beat.  It is because both companies know something that all of 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 research analyst George Grose, CFA, who is with American Capital Partners, a leading institutional broker and investment banking firm which covers the Online Financial Sector, 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).  Grose, who covers OXPS and SWIM and monitors all of the other publicly traded online brokers, has calculated the average number of trades per client for each of the brokers.  He found that Investool’s ThinkorSwim subsidiary ranked number one out of all online brokers with an average of 170 trades per year per client.  Options Express came in at a solid number two 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. 

Grose believes that Investools’ big advantage over the other online brokers is because of its educational platform.  He also says that 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 that he had previously held at Devry, a leading provider of for profit education services.  Finally, 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.

After writing this article it became rather obvious to me that educating investors is the key to secular growth for the Online Financial Sector.  Educated investors generate the following:

·        New clients for online brokers

·        Increase client trading frequency and profits for online brokers

·        New subscribers for live data feed providers

·        New subscribers for other tools and information which enable an individual to preserve capital and outperform the market

·        More advertising revenue for those web sites that provide online financial information

In my September 2007 article that I wrote in Equities, “From Supporting Role to Romantic Lead” I recommended the shares of Bankrate, Interactive Data, TheStreet.com and Morningstar.  The shares of each of these four Online Financial Information providers responded by hitting five-year highs during November and December of 2007. 

In all the years that I have been writing articles and recommending stocks, I have never had anything like this happen.  My 100% success rate for the September article got me thinking.  Having four picks in one article from the same industry all simultaneously marching to 5 year highs within 90 days after I recommended them is far beyond a coincidence.  In looking back, I also 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 including BankRate and TheStreet.com, which I recommended again in September of 2007.  Combine the two recommendation lists and I was nine for nine or batting 1000% on all of my recommendations.  What’s even more impressive is that four of my five OPS Newsletter recommendations appreciated by over 100%.  The only reason why one of them, Multex.com didn’t is because Reuters acquired them for a 54% cash premium only six weeks after I made the recommendation. 

The straw that broke the camels back is when I realized that Investools, the biggest winner of any shares that I had ever purchased, was also a member of the Online Financial Sector.  Investools shares paid for a good portion of my family’s living expenses between 2004 and 2007.  We had purchased 40,000 Investools shares for approximately $6,000 or $.17 per share in 2002.  By 2004 its shares were above $2.00.  Between 2004 and 2007, our $6,000 investment in Investools generated over $100,000 of income for my family.  I have been a struggling entrepreneur for some time and quite frankly for several years my family has primarily been surviving on my stock market winnings.  Without the extra $100,000 that was made on Investools we would not have been able to afford the tuition for my children’s private school and the ski vacations to Colorado.   

There is only one conclusion that I could come up with for my bullet proof results on all the recommendations that I have made in the Online Financial Sector since 2002 and also from my good fortune that I had with Investools.  Investing in companies that are members of the Online Financial Sector provides multiple “once in a life-time investment opportunities.”  Here are the five main reasons why:

• Cash Flow dynamics for the Online Financial Sector are super.  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 which enjoys such an advantage.  Even your garbage collector doesn’t send you a bill until after he has already collected your garbage.

• Client retention rates for the Online Financial Sector 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 Online Financial 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 Online Financial 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 long history of giving bad advice.  Many investors are going to find out that they unknowingly were purchasers of packaged sub-prime loan portfolios from their broker that will soon be valued at ten 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 because of their continuous bad practices will continue to suffer attrition and that is why the Online Financial Sector will grow unabated for the next 10 years.           

I am currently recommending the shares of the following companies in the Online Financial Sector.  I predict that the shares of each of them could make new 52 week highs during 2008:

Given (1) my successful track record for my recommendations in the sector, (2) the experience that I have gotten in tracking and monitoring the Online Financial Sector since 2002, and (3) the fact that StockDiagnostics.com, Inc. (http://stockdiagnostics.com/), the company that I founded is also a member of the Sector, I have decided to make it a high priority to follow the Online Financial Sector.  I am launching a web site, OnlineFinancialSector.com (www.onlinefinancialsector.com) and will post all of my updates and comments for this sector on this web site.  I will also give updates on the sector in my columns and articles that I write for Equities Magazine.  My goal is to make sure that all readers and followers have access to information and updates on the Online Financial Sector and the companies that I am recommending.  I strongly believe that the sector and all of the companies in it will significantly outperform the stock market and its major indices for the next 10 years.