Investools: Respectability Has Its Rewards

By Will Ashworth | April 21, 2008 AAA

Prior to the integration of ThinkorSwim in February 2007, investor education company Investools (Nasdaq:SWIM) was a terribly unprofitable business. In 10 years it only made money once, in 1999. Sales were growing but so were expenses. It needed to find a way to leverage all the people taking its courses and seminars. Investools found the answer in a small online brokerage outfit Thinkorswim Inc.

Now the company educates people through its seminars and then funnels them over to the online brokerage to set up new accounts. Lo and behold, it made money in 2007 for the first time in eight years. With operating income of $32.7 million and net revenue of $318 million, the company was on its way.

Company History
The New York-based investment educator and online brokerage has run educational programs for investors since the late 1990s. Its predecessor company, ZiaSun Technologies, created Online Investors Advantage (OIA). OIA was an early version of the company's Investor Toolbox software that exists today.

In September 2001, ZiaSun merged with Telescan, operators of one of the biggest online investment sites of the time. The company you see before you today includes Thinkorswim Inc., the best software-based online broker according to Barron's in 2006 and 2007. Investools paid $359.9 million for the company, completing the transformation from late night seminar hawker to a player in the financial services arena.

Monthly Numbers Extremely Bullish
On April 9, Investools announced March numbers and they were very positive. First, the brokerage side of things: There were 46,300 trades on an average day in March, triple the same month a year earlier. Total accounts open came to 148,975. Of those, 66,950 had some money in them. With assets under administration of $2.69 billion, the average funded account had $40,180 in it. Given 3,600 new funded accounts in March, this brought in an additional $145 million in cash to the brokerage.

On the education side, the number of active subscribers went over the 100,000 mark, up 17.2% from 2006. With the education business acting as a feeder for the brokerage, it's critical that this number continue to grow.

Not Everyone's Buying The Transformation
Once a huckster, always a huckster; say the cynics. Two well-known investing blogs - 10Q Detective and Kirk Report - give Investools failing grades. Of the two, 10Q Detective is far more damning, taking an almost grudge-like stance against the company. Problems cited by author David Phillips include using independent contractors who aren't licensed advisors, being an unaccredited educational institution, and providing coaches with less than 10 years investing experience. He goes on to cite numerous accounting red flags. He definitely couldn't be confused for a bull. While entitled to his opinion, I think he seriously underestimates the potential synergies of the Thinkorswim acquisition.

As for the Kirk Report, author Charles Kirk doesn't really have a problem with the company per se, rather, he's clearly not a fan of its hard-sell techniques. Phil Town, author of New York Times bestseller "Rule #1", has said that he also has a problem with the sales process but overall is very happy with the time-savings provided. This is a lot like the chicken and egg argument. You'll never get consensus. (For help selecting the right discount broker for you, check out 10 Things To Consider Before Selecting An Online Broker.)

Bottom Line
Investools stock is $7 lower than it was at the beginning of the year. That's a 40% haircut from $17. If you look at three of its direct and indirect competitors, you'll see that its stock is the only one worth considering. In terms of price to sales (a much better valuation metric than P/E in my opinion), it's trading at 2.25 times, half that of Optionsxpress (Nasdaq:OXPS), Charles Schwab (Nasdaq:SCHW) and TheStreet.com (Nasdaq:TSCM).

To learn more about the use of the price-to-sales ratio, check out Use Price-To-Sales Ratio To Value Stocks.

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