Dow Jones 12487.02 -15.54 9:12 am PST, January 27, 2007 NASDAQ 2435.49 +1.25 For info, visit access.smallcapnetwork.com S & P 500 1422.18 -1.72 Change your subscription status here Russell 2000 788.14 +3.95 VOLUME 07: ISSUE 11 Feature Edition: There's a Piranha in the Pond Company Name: Stockgroup Information  Systems, Inc. Stock Symbol : SWEB Coverage Initiated: January 27, 2007 Current Price: $0.74 Average Volume: 125,200 52 Week Range: $0.28 - $0.75  Suggested Target: $1.51 Suggested Stop: $0.34 Since our inception seven years ago, the SmallCap Network newsletter staff has practically seen and done it all in the small company arena. And in our many observations, we've managed to narrow down what we feel are the core common qualities of top-performing companies (and top-performing stocks). What's one of those critical characteristics? Being able to find an underserved and growing market segment, then meeting their needs - with a vengeance.  Well, we think we've found such a company again. To be honest, we feel merely saying 'this outfit meets the needs of an underserved market' doesn't do it justice. In a nutshell, we expect Stockgroup Information Systems Inc. (OTCBB: SWEB, TSX-V: SWB) to blow the doors off of any competitors in the same space. By the time the other players figure it out, Stockgroup may be the dominant name in the $6 billion (annually) online financial/investment content industry. We'd equate it to a lone piranha in a pond of helpless fish - a big, fat $6 billion pond. It's a wild comparison, but still begs the question .....would you rather own stock in the piranha, or in the rest of the fish? We choose the piranha, just like we'd choose Stockgroup.  Needless to say, we think owning shares now could be a very good idea, with triple digit returns being a distinct possibility. In any case, read on, and prepare to be impressed.   Catering to the Retail Investor  Of the 91 million investors in North America alone, 62 million of them have Internet access. A whopping 45 million of them specifically use the Web for investing information and advice. That number continues to grow each year. The race to create a large quantity of online investing tools, however, may have suppressed the notion of creating one, high-quality tool - until now. Seeing the unfilled need, Stockgroup has created a website and stock market tool designed to cater to the individual ('retail') investor's every need.  The primary website focused on retail investors is called StockHouse.com. The site is a comprehensive collection of market commentary, data, newsletters, blogs, and portfolio management features. While none of those offers are new, the way they're integrated is. In a very Web 2.0 kind of way, one free membership at StockHouse allows all of those features to be accessible within one browser window. The highlights of StockHouse.com are the 'BullBoards' and StockStream - a very comprehensive tool with real-time quotes, portfolio tools, charting, research, and more. There's a third site, called SmallCapCenter.com, designed to facilitate information-sharing about small cap trading ideas. (Sound familiar?) What does that matter to us? As usual, it's about the dollars. There are two paths to increased revenue for StockHouse - selling advertising space, and garnering subscription fees.  After we test drove StockStream, it seemed to be a pretty slick tool that should have plenty of appeal to this underserved group. Better still, we're expecting StockStream to significantly boost top and bottom lines. Hypothetically, let's say only 1% of those 45 million North American investors who use the Internet for advice decide to subscribe to StockStream. At $9.95 (US) per month ($12.95 Canadian), multiplied by 450,000 retail investors, it would generate around $4.5 million per month in revenues. For the sake of comparison, Stockgroup is probably going to end up doing a little less than $8 million in sales for fiscal 2006 (we're still waiting for Q4 figures). That's a big enhancement to the top line.  As for the StockHouse.com/BullBoards site, we have the same faith things are going from good to great. Currently the two distinct sites, StockHouse and SmallCapCenter, jointly attract 700K+ monthly visitors. That's not bad, but the company would like to see somewhere in the neighborhood of 2 million to 5 million visitors per month. It won't happen overnight, but with traffic forecasted to increase by 25% in 2007 (and perhaps more in subsequent years), we doubt a few million monthly visitors will take long to find. They're already off to a great start considering these stats...   StockHouse.com is the 2nd stickiest Canadian website  StockHouse.com is ranked the #1 (Alexa) Canadian site for retail investor-generated content  BullBoard.com is the top-ranked investing board in Canada, and ranks in the top 5 financial communities in North America  There's a third subscription-based revenue model being worked as well, which will provide access to premium and user-generated content. Add that revenue in to the potential revenue of the high-powered StockStream tool. Now add in what could eventually be a five-fold increase in advertising revenue thanks to ever-increasing web traffic. We think the sum total of all those enterprises equals one thing...huge potential gains for shareholders. And that's just the retail half of the business.    Arming the Institutions With Powerful Weapons  The needs of individual retail investors are growing but there's a whole different side of the business - the institutional need. This means banks, brokerage firms, media sites, and the like all need the same kind of investing information for their own clients and visitors. This helps the institutions attract and retain customers. For a financial firm to do this on their own it can be costly, difficult, or both. Therefore, the need to outsource financial information services is also growing.  Using the same delivery platform the retail client accesses, Stockgroup can provide tailor-made institutional solutions up to and including a 'white label' program. This can make it appear as if the the institution is the service provider. Of course, there's a licensing fee involved, so more institutional clients means more revenue.  The way we see it, the potential for more revenue from this side of the business is tremendous. At last count, 12 of Canada's top 30 brokerage firms were Stockgroup clients. That degree of penetration is impressive, but we're just as excited about the company possibly getting the other 18 on board. It would more than double the sales in that segment. The same idea applies to the media. Four of the United States' top 15 newspapers are clients. Adding the remaining 11 would more than triple the sales from this group.  But here's the piece de'resistance....Stockgroup can now offer co-browsing between brokerage firms and their brokerage clients using their platform. What's co-browsing? It's a way for the brokerage client as well as a representative from the brokerage firm to both work with the same browser window at the same time. It allows real-time, web-based collaboration, whether it be as simple as finding a news feed or as complex as creating a watchlist. The value to brokerage firms is clear - it could strengthen the broker/client relationship. In our experience, institutions are willing to pay a premium for anything that makes it easier to keep a customer. Better still, we know of no one else who can provide that kind of unique service. Hence, the institutional appeal of the Stockgroup offer just moved up a notch, and we think revenues are likely to follow that lead.    A Likely Valuation, Post-Acquisition So what's the company worth? If you had asked a couple of weeks ago we would have told you the market cap was around $15 million with annual sales around $8 million. But, a key acquisition has apparently made a world of difference - for the better.  The company bought the Mobile Finance Division of Telecommunication Systems Incorporated. In so doing, wireless delivery of Stockgroup's financial content became part of the offer to retail investors. All that's needed to receive the feed is a device like the increasingly-common Blackberry or Windows Mobile 5. It was a Web 2.0 initiative Stockgroup wanted to pursue anyway, but the acquisition allows the company to forgo the development time needed to bring such a service to the market.  The price tag was $1.5 million....an amount we think is stunningly low, knowing the enterprise generates $6 million in revenue every year, and is profitable. Granted, Stockgroup also took over all the assets as well as liabilities, but still, it seems like a bargain. See, the purchase also included the Mobile Division's already-existing clients.....like Citigroup, Merrill Lynch, and Barclays, just to name a few. With a simple pen stroke, Stockgroup now has an 'in' with some major names in the investing world. We think they'll be able to do a lot more with the relationships than Telecommunication Systems could.  So, the annual sales figure basically jumped to $14 million. The stock jumped too, as shares surged from 43 cents to 73 cents a mere two days after the news broke. The market cap is now around $30 million, by our calculations. That's a big move on all counts, but you know what? Even after the 69% rally in just the last two sessions, we'd say the stock is still a bargain. How? Because we believe the company when they say they're planning on revenues of $5 to $8 million per quarter by the end of the decade, which could mean between $2 to $5 million in quarterly operating profit. Assuming they get about $7 million in quarterly revenue within three years, that would mean annual sales around $28 million - twice what they are now. If the market cap valuation does nothing except remain twice the yearly revenue figures, investors would still be looking at a doubler.  But frankly, a market cap twice that of annual revenue is still a little low compared to some similar deals we've seen lately. Dow Jones bought MarketWatch for $519 million when the website was only generating $80 million in annual revenue. The price tag was 6.5 times sales. D&B bought Hoovers for $117 million, though Hoovers only saw sales of of $32 million over the twelve months before the acquisition. That's 3.6 times annual revenues. Based on those and other comparable acquisitions, we wouldn't be shocked to eventually see bidders offering prices as high as four times Stockgroup's revenues. Meaning, if Stockgroup can push sales up to only $20 million, a market value of $80 million wouldn't be out of the question. That would be about a 166% gain from current price levels.  Sounds crazy? Not to us. Remember, the retail website traffic is growing enormously, and the institutional offer seems second to none. On both fronts, there are presently more non-customers than customers, so there's just all kinds of room for improvement. Factoring in the strength of the service they offer, we just have to feel really optimistic about the potential upside for shareholders.    From Hypothetical Valuation to Specific Target While we used the hypothetical buy-out framework to establish a likely value for SWEB shares, it's not really an idea we want to expect. If it happens, then great. If not, then the stock has to be able to stand up on its own merit. Of course, we think it does.  There are two key things we really like about Stockgroup's business model. The first is, it's a scalable and high margin business. Now that the technology is built, it can be used by 1 million users just as easily as it can be used by one user. Yes, there's a small per-user expense, but the biggest chunk of the costs are fixed. With $15 million in revenues, the company foresees an EBITDA of 21%. At the $50 million revenue mark, EBITDA is expected to be around 35%.  The second thing we like ...they're in a great segment of the industry. We agree the retail investor group is still underserved, and the available tools are lacking. Additionally, there's still little to no opportunity for an investor to participate in an investing community. Stockgroup, through StockHouse and its offers, sure looks like they're going to change that. Though the 'If you build it, they will come' mantra doesn't necessarily apply to all websites, Stockgroup has already proven to us they can draw a crowd.  After putting all the pieces of the puzzle together, we suggest a target of in $1.51 in U.S. dollars for SWEB, and we suggest a stop of 34 cents. However, in light of the giant runup late last week, we'd also say waiting for a better entry opportunity could be wise. Though we don't think it pays to be penny-wise and pound-foolish, we also don't think it makes much sense to try and jump in at what could be a short-term high. Maybe we're wrong, and SWEB will end up running higher anyway, but as far as we're concerned, we feel shooting for an entry level of 60 cents or lower makes good trading sense. If it doesn't happen, then we'll look at other possible entry scenarios later in the coming week.  If you're trading the stock on the Canadian exchange (TSX-V: SWB), the suggested target is $1.81 (Canadian dollars), with a stop of 40 cents. We're pegging the entry limit on the Canadian version at 72 cents for the time being. If need be, we'll revisit our suggested entry level this coming week.  Based on our number crunching and examination of how StockGroup plans to stay highly competitive over time, we have to believe shares are worth considerably more than where they're trading now. And as 2007 unfolds, we feel the strength of the company's results will continue to create major appreciation in the stock's trading level.     We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130   Subscribe Information is power and timely information is profitable. Become informed and profit from Small Cap Network Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. 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Unsubscribe Here D I S C L A I M E R: The Small Cap Digest, the Small Cap Network, its website and email newsletter (hereafter, cumulatively referred to as "SCD") , is an independent electronic publication committed to providing its readers with factual information on select publicly traded companies. SCD is owned and operated by TGR Group, LLC ("TGR"). TGR is not a registered investment advisor or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, TGR accepts compensation from third party consultants and/or companies, which it features in the publication and circulation of SCD. 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