Deal with Canada’s Fastest growing Online Broker Validates Emerging Company’s Business Model
By Michael Markowski (November 11, 2009)
Global Investor Services, Inc., (OTCBB:GISV:$.05), a company which is one of ten companies in the Online Financial Sector which I am currently recommending and holding, announced that it had signed a Letter of Intent with Questrade, which is Canada’s fastest growing online broker according to Investor Economics. Questrade is the first Canadian broker to allow Canadian investors to trade US stocks and options in registered accounts (Retirement Accounts) without the currency conversion fees. In the press release Edward Kholodenko, President and CEO of Questrade® said: “Our agreement with Global Investor Services continues to demonstrate our commitment to providing our clients with a full suite of resources to support their trading. In addition to our Toronto based state of the art Learning Center, we are adding the GIS platform so our clients will be able to access extensive training and analysis tools anytime, anywhere!”
Information that I have been able to gather on Questrade indicates that it has tens of thousands of active clients and is adding over 4,000 new clients per month. Questrade has also been very aggressive with its marketing activities and has over 200,000 unique visitors to its web site each month. Questrade is Canada’s lowest priced online broker and they are taking market share from Canada’s four largest banks who dominate the online brokerage landscape.
From the information, which was included in the announcement it appears that Global will be providing investor education and information services to all of Questrade’s clients. Regardless of how the definitive agreement between the two companies is structured Global looks to be a sure winner because its existing base of 1,700 customers is 60% less than the number of clients that Questrade is adding each month. If Global were only able to generate a small amount of revenue per client or a larger amount of revenue from even a fraction of Questrade’s clients the revenue and profit that it could generate would be significant.
One significant item of interest that I would like to point out from doing my research is that prior to its entering into a Letter of Intent with Global, Questrade has partnered with the Online Trading Academy. It is one of the largest providers of investor educational courseware in Canada and the United States. At Questrade.com, I found that the Online Trading Academy have been promoting their courses, which are priced between $5.000 and $25,000 to Questrade’s clients. That Questrade is linking to Online Trading Academy products and services on its web site bodes well for Global in finalizing its definitive agreement with Questrade.
The even more important question to ask is why is Questrade entering into a relationship with Global when it already has one with the Online Trading Academy? Obviously, the Online Trading Academy is at a disadvantage to Global. There are two reasons why. The first is that the Online Trading Academy utilizes a brick and mortar class room environment to teach their students. Global’s courses are taught online and can be taken by students anywhere at any time. The second is that the Online Trading Academy’s prices range between $5,000 and $25,000. To attend a course requires a student to make a significant financial commitment. Global on the other hand charges between $100.00 and $300.00 per month for courseware and training, which is equal to or better than the Online Trading Academy’s courseware. Therefore, Global due to the convenience and pricing of its investor education platform is in a much better position than a traditional provider to assist a fast growing online brokerage firm who is competing on price.
Another thing to seriously ponder is the fact that Global’s mass market penetrating online business model is not being offered by the Online Trading Academy, which is a much larger and formidable competitor. This speaks volumes to the fact that the investor education market is moving to the mass market via online education and training and that Global is out in front of the pack and is leading the charge. Most of Global’s larger competitors including Investools, Online Trading Academy and EduTrades have relied on brick and mortar classrooms to teach investing to approximately 1,000,000 individuals over the last ten years. I predict that business models such as Global’s new revenue and pricing model, which makes training more convenient and affordable will revolutionize the investor education industry and exponentially increase the number of new students.
Based on the research that I have done, I can see why the deal between Questrade and Global is a perfect fit. Questrade, the price leader in Canada needs a low cost and high quality online investor education solution for its current and prospective clients. Global happens to be the only company that I know of which can provide such a low cost and high quality online solution.
That Canada’s Questrade is entering into a relationship with Global Investor Services should be taken by its shareholders as a significant vote of confidence for the company, its online investor education products and its management team. The announced deal between Questrade and Global, undeniably the most speculative of my 14 recommendations that I have made in the Online Financial Sector between 2002 and 2009, gives further credence and support for my thesis that the Online Financial Sector is the lowest risk sector for investment out of all of the more than 200 industries and sectors, which I follow. The entire on-line financial sector is undergoing a consolidation. On-line brokerage firms are scrambling to provide a broad suite of education and tools for their clients. The quickest way to accomplish this has been through mergers and acquisitions. Just in 2009 we have seen Ameritrade acquire Think or Swim, OptionsXpress acquire Optionetics and MB Trading acquire Wizetrade (Dynetec.)
I have been saying repeatedly that I believe that Global’s online investor education products and services are state of the art. Now Questrade, Canada’s fastest growing online broker, is confirming what I have been saying since early 2009. So why are Global’s shares still trading for under a U.S. dime? Part of the answer to that question is the harrowing period Global has recently survived – an experience that would have put almost any other company out of business.
Due to the melt down in the global economy in late 2008, Global had to completely scrap its low margin brick and mortar investor education model, the same one that all of its competitors such as the Online Trading Academy are currently using, and replace it with an online model, which offers better pricing options for students and higher profit margins for the company. In making the transformation it had to incur significant losses and it had to undergo a complete restructuring of its Balance Sheet. The management of almost any company in such a negative position would have thrown in the towel. However, Global’s management did not give up because they were convinced that they had the right formula for success. They believed their online model would deliver significant profits and a share price, which will eventually be significantly higher than $.25, which is the price per share that they agreed to convert their debt into equity at, earlier in 2009. In other words, they believed in their product! The fact that they were able to re-design their model so quickly is a testament to their flexibility and strength of their management team.
The fact that the fast growing Questrade is doing a deal with Global Investor Services, the riskiest of the ten companies that I am currently recommending supports the rationale behind my argument that the online financial sector is the best one to invest in out of all industries and sectors that I monitor. Following are the reasons why I believe that the Online Financial Sector provides investors with the lowest risk and highest reward investment opportunity:
- Over 90 million mutual fund investors are frustrated. The value of their mutual funds have not gone up over the last 10 years. An increasingly number of them are fed up and they are becoming do it yourself investors. In doing so they will create increasing long term or secular demand for investor education, online brokerage and financial information.
- The younger generations of investors are embracing online brokerage over traditional brokerage at a faster pace than the older generations. A survey conducted by Gartner in 2008, showed 17 percent of "pre-boomers," those 63 years old and above, use online brokerages. This compared with 29 percent of "Gen X"ers (ages 33 to 44) who have online brokerage accounts. Eventually, I believe that a majority of all investors will invest online. I believe that the online financial sector and the companies in it are getting ready to experience the same type of exponential growth that the PC experienced in the 1990s.
- The online financial sector by far has the best cash flow characteristics of any of the over 200 industries and sectors that I follow. Unlike almost all other industries or sectors, those companies residing in the online financial sector for the most part do not have inventories or receivables. Their customers are required to make cash deposits or have their fees paid up front by a credit card before they can get access to products and services. The sector’s cash flow characteristics are the primary reason why I can comfortably recommend Global Investor Services, a company whose shares are trading for pennies.
- The average gross margin for the companies residing in the online financial sector is above 60%. Of the 228 industries that I follow there is only 17, which have a gross margin in excess of 60%. That the sector has such high gross margins while having the best cash flow characteristics is “extremely rare”. In my 32 years in the investment industry I can’t recall of any industry or sector, which had both high gross margins while at the same time having such great cash flow characteristics.
Since 2002, I have recommended the shares of 14 companies who reside in the Online Financial Sector. If one had invested an equal amount of money into each of the 14 on the dates that I recommended them and “held” them until October of 2009, the value of the portfolio increased by over 250%. To get this return all an investor had to do was follow my simple approach of buying the shares when I recommended them. I have never issued a sell recommendation on any of the 14 since I recommended them. Of the 14 recommendations the first four that I recommended have been acquired. Of the ten remaining, five have share prices, which have increased and five have share prices, which have declined. None of the 14 including my worst performing recommendation, Global Investor Services, has gone out of business.
Online Financial Sector Recommendations by Markowski 2002-2009
*Acquired by Dow Jones, **Acquired by Reuters, ***TD Ameritrade completes Think or Swim acquisition (June11, 2009), ****Acquired by Apax Partners 09/09
It is clear that my credibility is down with those who have purchased shares of Global Investor Services, Inc., since they have declined by 72% from my original recommendation price of $.18 per share. However, one must remember that the show is not over until the “fat lady sings.” Let me explain. In the Spring of 2003, I suggested the shares of Think or Swim (formerly known as Investools), another penny stock company who at that time was the only publicly traded investor education company to my wife and several close friends. The shares at that time were at a price of two thin dimes. Anyway, to make a long story short after the shares were purchased by my wife, they promptly traded down to $.13, which represented a swift and ugly 33% paper loss. After that the shares made their way back to a $.20, closing price at the end of July. They then proceeded to take off and closed above $1.00 for the first time since I had been monitoring them on November 10, 2003. That was the date in which I published my recommendation on the shares. Back then I purposely did not publish a recommendation on any shares unless they were trading at above $1.00, because at that time I did not want to have a reputation of recommending penny stocks. After the success that I had with Think or Swim though, I vowed that if I ever came across another one I would recommend the shares at even pennies per share.
What I found interesting about my experience with Think or Swim is that if I had suggested or recommended its shares at their high ($.67) in early 2002, my wife and friends would have suffered a paper loss of 90% when the shares hit their October 2002 low of $.06. I only narrowly escaped the doghouse, because I discovered the company later rather than sooner. Therefore, there is a fine line from being the hero or the goat and that has to do with luck or the timing. Think or Swim was acquired by Ameritrade in June of 2009, for $10.45, an 816% return based on my $1.14 recommended price.
I believe that Global Investor Services today is at the same turning point that Think or Swim was at, back in 2002. Think or Swim’s share price fell from $1.40 in December of 2001 to as low as $.06 in 2002 before it made its two year round trip back to $1.40 in December of 2003. For 2001 and 2002, Think or Swim’s cumulated losses were $85 million. Because its business model had failed Think or Swim in 2002 made a strategic decision to enter into revenue sharing relationships with third party marketing partners who would pay for all of the advertising and marketing costs to acquire students. It was a simple solution which allowed Think or Swim to flourish and become the largest investor education company.
Global has recently undergone such a metamorphosis. I believe that its announced deal with Questrade is a clear signal that it now has a formula that will deliver success to its management and shareholders. Similar to Think or Swim in 2002, Global has found a partner that will provide it students. I believe that Global’s strategy to join up with online brokers is a much better and lower risk strategy than the one that Think or Swim came up with in 2002. Furthermore, by linking up with Questrade, Global has significantly increased its visibility and has gained credibility with the North American brokerage industry. There are over 5,000 small brokerage firms in North America. To remain competitive a majority of them have been making the transition to providing their clients online brokerage services. All of these brokerage firms will need to provide education to their clients in order to compete with each other and maximize revenue from their clients. Global is now uniquely positioned to provide its online investor education products and services to the clients of these brokerage firms.
It’s ridiculous that the shares of a company (Global Investor Services, OTCBB:GISV) who is emerging as the leader in the providing of “online investor education services” to be priced at a nickel per share. Now that Global and Questrade are linking up, the risk in holding Global shares for long term investment has reduced considerably. The shares of Global are an incredible bargain. It is an operating company, which has a state of the art product, fixed overhead and a nimble management team. That Global, a company in which I am a shareholder of has jockeyed itself into position to lead the “online investor education industry” gives me goose bumps. It could be déjà vu for my wife and I because we made between ten and twenty times on the investment that she made into Think or Swims’ shares in 2003. Given this possibility, I am currently recommending the aggressive purchase of Global’s shares for those who can afford to buy and hold the shares for a multi-year period.
I am also currently recommending the purchase of shares in all of the other nine public companies in the online financial sector, which I originally recommended between 2002 and 2009. My wife and/or I currently hold shares in all of them. I believe that the shares of those five who have share prices below my original recommendation prices are especially attractive.
For more in depth information on all of my recommendations and the rationale as to why I believe that the Online Financial Sector is the best of all of the over 200 industries and sectors that I am monitoring I suggest a review of my previous reports and articles:
“Online Investor Education Company Makes Bold Decision”, March 26, 2009, Blog
“Business for Online Brokers is Booming; Penny Stock Company’s Gross Margins Put It In Enviable Position”, April 24, 2009, Blog
“Cyber Gains”, April 2008, Equities Magazine article
“Betting The Odds”, August 2009, Equities Magazine article
Additional articles and reports on the online financial sector and its members are available at http://www.onlinefinancialsector.com/.
Disclosure: Michael Markowski, the founder of OnlineFinancialSector.com and/or immediate family members currently hold shares in the public companies recommended on the OnlineFinancialSector.com website and may buy or sell shares without notice.
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