(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
All in all, I am satisfied with my buy recommendation on shares of TheStreet.com (TST), with shares up 27% relative to the S&P 500 (SPY) 3% return over that same time frame. The thesis at that time (which remains true today) is that TST has a strong balance sheet with net cash and a scalable digital publishing operating model from which to sell premium content.
In addition, in my opinion, the TST common shares have been, and continue to be, artificially depressed as a result of the preferred shares held by Technology Crossover Ventures (or "TCV") which requires a $55 million cash payment to liquidate. If or when TST figures out a way to redeem the preference shares, I expect a nice boost for the common.
Meanwhile, TST has picked up an activist investor, Spear Point, who continues to agitate for change. Here again, I view this as a plus for the common shareholders. I understand that Spear Point put together a go-private offer in the autumn at $2.80/share, a value that we are approaching today. My guess is that Spear Point's strategy would be to leverage the TST balance sheet to redeem the preferred shares using little of its own cash. That would probably be a good strategy, and one that TST should consider doing if it remains a stand-alone company.
A Personal Note
Over recent weeks, I have taken particular issue with certain of TST's journalists who, in my opinion, have an affinity for over the top sensationalism. As a risk-averse investor and writer, I like to stick to the facts and generally eschew the noise coming out of the financial press.
But the noise out of TST has become extreme cacophony and bordering on the limits of fair, unbiased and quality journalism. Sure, it is easy to take shots at Sears (SHLD), but to suggest, as one TST writer did, that he and all his readers are smarter than Sears management and that Sears employee's should quit their jobs and look elsewhere, well, that is nonsense.
But, in addition to the journalism concerns, I have also begun to reevaluate another key piece of a quality internet property - the user interface.
Web Design & User Interface
When I'm not writing, I'm working on developing a web application called indievestments to make the investment research process easier, particularly for finding, organizing and storing primary source data. I refer to the web app (currently in development) as research-as-a-service ("RaaS").
As part of that process, I have become very discerning in terms of the user interface and experience. I continue to believe that the web continues to make leaps and bounds improvements in design, like the changes you have seen on Seeking Alpha recently. The new design is focused on cleanliness rather than clutter and is incorporating some important elements of web design related to the readability of text.
Seeking Alpha (link)
The Street (link)
Now, to be fair, I have access to Seeking Alpha's PRO platform which is devoid of advertisements, but even the regular platform is cleaner than TST's. I would like to point readers to TST's busy design, full of "call to action" buttons throughout. Even in the text, the column is broken up by a sales pitch and, even more incredible, certain words contain link bait (the words in green).
I realize that TST is trying to convert readers from its free site to paid subscribers for its premium content. However, the subscriber bucket will likely remain leaky in terms of customer acquisition because readers don't want to be bombarded with sales pitches.
The value proposition, especially in investment related content, is actually the content itself. By obfuscating the message being delivered, it is my opinion that TST is doing itself a disservice. I understand that the free site now accounts for 33% of new paid subscribers, up from 8% in 2011. In my view, that number could certainly go higher if TST revamped its user interface which provides readers a clear call to action based on quality, actionable investment-related content. By focusing on fear and sensationalism as its currency on the free site, I think TST is could be driving potential paid subscribers away.
This column should not be read to suggest, however, that TST doesn't have an incredible brand and expansive reach. Having an association with Jim Cramer is a particularly important asset, as his reach extends into market segments that TST wishes to sell content, retail investors. And it appears as if the leaky subscriber bucket is being mended, where subscriptions account for 80% of TST's revenue and which was up 25% year/year (mostly on the back of acquisitions).
That said, I continue to believe that the "yellow journalism" -- at least, in my opinion -- is a detriment to driving even more value for common shareholders via more paid subscriptions.
There is no question that TST is led by a terrific and proven leader in Ms. DeMarse. However, with TST handily beating the S&P 500 over a comparative time frame since my first recommendation, I would be remiss if I didn't suggest that taking a profit here is not a terrible idea. Having said that, I think TST remains undervalued on account of its high-margin subscription revenue stream, and I admit that my views have changed based on my perception of certain intangible factors driving value at TST.
Investors have already received one positive boost from the reinstatement of a quarterly dividend at TST. The next catalyst is likely the removal of the preferred shares held by TCV. Until that time, I expect the common shares to remain range bound.
In my view, the quality of the journalism and the cluttered user interface at TST are cause to reevaluate the investment thesis. While I believe these shares remain undervalued and I wouldn't bet against Ms. DeMarse, I am finding better places to allocate capital these days. While I still don't see many ways common shareholders get hurt at the current quote, I have admittedly soured on a couple of key aspects at TST.