Bearish Future on TheStreet TST & the Inability to become Profitable

TheStreet TST is a penny stock I can’t ignore. This financial news company, originally founded by Jim Cramer is such an affordable price, offering such a promising story. Yet there are inherit problems with the company such as the lack of profitability, the absence of long term strategy, and an inability to find the right management.

I wrote my first bullish take on TheStreet TST back in October. Of course the numbers don’t lie. Then I was not so concerned with the analysis of the company as I was for its continued assistance from Jim Cramer. The Mad Money star is a majority shareholder and continues to be a poster boy for several of the hallmark products offered by the company including Action Alerts Plus.

In many ways though, TheStreet is a bargain. For $2 or less, young investors can own a stock that sells for less than the cash value of the company. The Street does not have any borrowed debt. This is actually more rare today. Even rarer, the company is trading for a price that is less than its cash holdings. Essentially, if TheStreet did not offer any services, you are investing in cash holdings that are worth more than what you are paying at less than $2 a share.

Even with my bullish past in this company, many red flags have emerged that have worried me as an investor, not a speculator. In fact, a lot has to change before TheStreet emerges as a solid investment.

My first concern is the lack of profitability. As of current TheStreet has $57 million in sales but $-8.57 million in income. This is a fundamental concern. Many investors argue that with growth a lack of profitability is tolerable. However in this case I see little room for growth.

Financial markets news and commentary is available everywhere and most of it free. Action Alerts Plus is also a hard sell and one of the worst performers in the investing category of affiliate programs such as Commission Junction. Premium services are down 7%. With Jim Cramer’s face plastered all over it I expected more. The competition is endless and in many cases offers most of their services for free.

Further I have to be worried about the strategy of the company going forward. TST does not have a long term strategy that makes it any different from any other financial news source. The website is awash in annoying advertisements (some of which are unrelated to TST, losing business) and poor navigation. As a user I hate to have to click to the next page of an article to only be teased in the title. No thanks, I’ll just go back to the Fool.

As far as management is concerned, they are all over the board. TheStreet has failed to find a solid group of individuals with the foresight to move the company out of their backwards strategy for profitability, actually most recently taking a beating. Daryl Otte’s recent placement as CEO and then resignation in March is troubling. Perhaps exciting for those looking for a change.

Some are arguing the large holding of stock management has including Jim Cramer, a majority stockholder as evidence for confidence in the company. However as I pointed out, insider trading in penny stocks is not always a great indication of confidence. This is because TheStreet sells for such a small price that Cramer and company can afford to own a majority with little risk to their net worth and everything to gain if the stock eventually recovers. You as a small investor will suffer the loss.

As I stated, a lot of things have to go right for TheStreet to turn around. A larger web presence with increased traffic does nothing if TST cannot capitalize and monetize their readers. With 25% more traffic this quarter, TheStreet should have better profitability.

Never mind the 5% dividend or $1.00 per share. It looks juicy but is likely not stable and certainly not growing anytime soon. Keep an eye on the TheStreet for the fact that it is so cheap but wait for profitability and positive revenue before even thinking of pulling the trigger. If they can’t get out of the gutter this penny stock will end up like all others, over to the pink sheets.