Taking a Fresh Look at TheStreet.com (TSCM) (Part 1)

Disclosure: I am a paid subscriber to RealMoney.com, and was a shareholder of TSCM up until a few weeks ago. I may open a new position in TSCM at some point in the future. This is a two part writeup; link to part 2 is here.

Summary:

I bought TheStreet.com (TSCM) about two years ago, and recently sold out of my position around $8 per share (~75% gain, ~32% compound annual return). I am writing up my rationale for the purchase and sale for my own benefit and as part of my 2006 resolution for DDO content.

I have never seen TSCM as perfect, but it has long been good enough. Although news of its dividend is mitigating investor disappointment over the fact that the strategic review ended without an acquisition, I think the possibility for near-term downside in TSCM exists as the market figures out what to make of the standalone business.

Having reflected on TSCM's business model and prospects, I have only about 55% confidence that walking away from the stock for now was the right decision, but it's done and I have other positions to tend to. I will continue to watch the company, as I think TSCM has every opportunity to make this business work through the right mix of services, advertisers and content.

My original investment rationale:

• Peter Lynch: "Invest in what you know." I personally found value in the company's approach to news and commentary. TSCM was getting $300 out of my wallet, which put TSCM ahead of every other media businesses I interact with.
• Margin of Safety: the business had about $25 million of cash in the bank to keep itself going, and was generating about $25 million a year in revenues, a solid base of business.
• Great Brand in Great Niche: TSCM had a great brand in a niche where people are inclined to spend a decent amount of money. I was fairly certain that TSCM would be an acquisition target. (Ed: I still haven't ruled it out!)
• Most newspapers would kill to have a model like TSCM: TSCM is already 100% on the web (no printing costs), gets paid by readers for online content, and has a talented, high-profile writer with serious ownership incentives.
• Diverse News/Commentary Offering: Unlike the WSJ, TSCM doesn't just provide news; it also offers you the opportunity to see how market experts think about companies and situations. Only IBD offers a comparable news and education package, but a fair amount of it is black-box technical analysis, which is not that useful for aspiring fundamental analysts. Despite churn in the roster of TSCM writers, new money managers who can write are added all the time. (These days, investors who write are a dime-a-dozen...)
• Emerging Profits at TSCM: This was proven to be a lark (early 2004), but at the time I bought into TSCM, the company had just posted its first ever profitable quarter ($0.01 EPS in 4Q03). Nothing to write home about, but it was promising.
• Improving the Business Wouldn't Take Much: Although I was (and remain) concerned that TSCM management doesn't really "get" the potential of their site - including coherent, uncluttered web design, RSS, blogs, navigability, AJAX features, etc. - I figured that it wouldn't take much to get on top of this.

Despite these positives, I still had/have a few serious concerns about the TSCM model and how management sees the opportunity in their market segment. Here are my negatives on TSCM:

• TSCM site is still not "sticky" enough: Yahoo Finance gives me oodles of reasons to stick around, and Reuters is coming up with some impressive features as well, like premium screening. TSCM recently added financials and filings - meaning...that this premium, standalone site is now only a little less behind the free offerings on Yahoo Finance or Reuters. Examples of easy additions that would be useful: pre-baked valuation ratios, and more RSS (ability to read a single columnist, sector news, etc.)

• Enhance cross-selling (without bugging customers): ending the practice of calling customers about upselling was a good idea. However, finding ways to sell useful premium market data or commentary is important. If TSCM can't develop new premium services to sell...partner with or acquire other providers! People spend a decent amount of cash to get their investments right, and TSCM should seek to capture more of that spend.
  

• Cluttered, confused pages: Even Ed, with close to zero experience with web design, could come up with a better format for the site, and yes, I know they just re-designed it. (The redesign represents progress, not an end point.) For example: perhaps users can customize the look and feel of their own home page, or TSCM could make a push towards using their site design as a means of helping investors manage information overload, making it a "first stop" throughout the day to see how markets are going.
  

• Overly dependent on ActionAlerts? One of the pieces of information I've not had luck tracking down was what their mix of revenues are for various services - ie, how much does Jim Cramer bring in via ActionAlerts. The only disclosure around premium subscriptions is bundled, telling you which services in aggregate saw revenues increase, and which services in aggregate saw revenues decrease. I understand why TSCM might be sensitive to this data, which is why I ask about it. If TSCM needs to diversify its premium subscription revenue, they shouldn't hide that fact.

• Management doesn't understand new web technologies? TSCM's press release on their new premium blogs makes me worry about how management thinks about opportunities created by new technologies. Check out this press release:

  "Our readers can now respond to a commentator's post and become part of the blog itself ... This is a win-win ... Our readers get to ... participate in the site in real time, and we can monetize user-generated content at no cost."

In my experience, commenting on a blog is not about helping a site make more money - it's about communication and questions - which requires additional time from writers -  which means that net-net it's probably a drag on the productivity of their most valuable writers...but it does enhance customer relationships and site quality. I think it's a bit of a problem that management doesn't understand this better.

Now, with TSCM so dependent on Jim Cramer, some critics have raised concerns about whether Cramer's central role in the company is a serious weakness in the business model. From the perspective of Cramer's health and welfare, I'll grant that this is critically important, as if Cramer ran into any kind of health problem, the company would also suffer a serious short term crisis. Not to say that all the value is in Jim, but he's as good a public a face for this business as it will ever get. (Perhaps they can purchase Cramer-surance...? I'm sure Lloyds can write it...)

There was a bit of guff on Seeking Alpha about insufficient ties between TheStreet.com and Cramer, but this argument was pretty poorly thought out. Not only is it factually incorrect from a contractual standpoint, but Cramer also has equity in the company valued at around $14 million (2mm shares @ $7 / share). Hence, I have a hard time understanding how anyone could think Cramer' interests were not powerfully aligned with TSCM.

From the perspective of an acquiror: I think Cramer would see through TSCM to a potential transaction, as well as being open to opportunities with whatever company that came along. Why? Cramer does what he does because he likes helping the little guy. It doesn't mean he'd stop writing or talking about stocks in an acquisition, he'd just have to be addressed individually.

There have also been some chatter about analyses on Cramer's stock picking abilities from CXO Advisory, which I have written up before. Since I personally don't think broad market forecasting ability matters, the real liability would be that viewers get upset with his quick buy/sell advice and try to sue...CNBC. In that scenario, a loss of credibility would be a negative for TSCM.

However, it's easy to be critical of Cramer, who presents a manic public face where other investment professionals prefer to be secretive, folksy or haughty. Here are two significant positives about Cramer's various media manifestations:

• Cramer is highly entertaining and attention getting. He cuts through the clutter of a very dull CNBC evening line up, and is a clear, direct writer who gets his message across quickly. Whether you're flipping the channel or surfing the headlines, Cramer's articles and persona help rope you in, which will keep undisciplined average investors focused on investing...when they might be otherwise tuned into the Food Network...or GoFugYourself.

• Cramer makes the closed world of professional stock investors accessible to new investors. That's no small feat, and it's important, as it takes a certain level of sophistication to be able to invest without anyone to consult for advice. Cramer, more than most writers you will find, makes many parts of his investment thought process accessible.

(Ed: This is the first part of a two part writeup. Click here for the second part.)