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“Get Rich Now!” with Whitney Information Network

By Michael Brush
Exclusively for InvestorIdeas.com
December 28, 2006

If you’ve ever had doubts about those late-night day trading infomercials promising an easy path to “financial independence,” it turns out you may be right.

Earlier this month, a trading seminar company called Whitney Information Network (RUSS) of Cape Coral, FL, fessed up to making false claims about the success of its trading techniques.

It turns out that the executive in charge of sales and marketing at EduTrades – an equities trading seminar division – was claiming a level of trading prowess that wasn’t …um… exactly supported by his trading records, according to the company. The EduTrades chief marketer was summarily dismissed.

Whitney Information Network says it discovered the discrepancy as part of an internal investigation carried out after both the Securities and Exchange Commission (SEC) and the United States Attorney's Office for the Eastern District of Virginia announced they were sniffing around the same issue.

The revelations capped a series of calamities which would normally make me steer clear of this company based on the age-old market adage that “where there’s smoke, there’s fire.”

But there has been an alluring sell-off in the shares. In the past eight weeks the stock has fallen so low it now trades for a market cap equivalent to the amount of cash on the balance sheet, which means you get its business “for free.”

Is it worth it? I’ll venture a “yes” because of some big insider buying -- but be careful with this one.

Besides the two investigations into trading records and the sacking of the EduTrades chief marketer, the past few weeks have also brought the following.

The resignation of its head of communications who made a “misstatement” to the press about the reason the EduTrades chief marketer was canned, according to the company.
Notification by the SEC of another investigation into whether Whitney Information Network violated securities laws in carrying out acquisitions.
Withdrawal of a filing to spin off EduTrades and make it a separate public company.
The termination its chief operating officer – it’s not clear why.

Whitney Information Network also restated earnings for the past five years recently, because of revenue recognition and other accounting issues.

To top things off, this company’s ticker appears to come from the abbreviation of chief executive Russell Whitney’s first name, which would be an unforgivable and potentially ominous act of hubris.

Solid growth trends

As bleak as the picture looks – and as cheesy as those instant riches infomercials can be -- Whitney Information Network must be doing something right, according to the numbers it puts out.

Consider this.

In the third quarter, sales increased 18.8% to $52.3 million. Here’s the most remarkable thing about that growth. The company generates most of its revenue (71%) from real estate seminars -- yet the ongoing weakness in the housing sector apparently didn’t put a dent in sales growth in the September quarter.
Cash was up 8.8% last quarter to $58.3 million, and operating cash flow was up 31% to $7.9 million.

Those are some pretty good results for a business you can essentially now buy for free. Whitney Information Network’s market cap of $54 million is about equal to its cash holdings. At $4.70 the stock trades for a paltry .29 times sales.

Wannabe Donald Trumps

Bsides EduTrades, Whitney Information generates its sales growth and cash from traveling seminars on how to strike it rich in real estate and the equities markets.

The courses have names like Building Wealth, Cash Flow Generator, MillionaireU Real Estate Training, Teach Me To Trade, Star Trader, Options Success, Stock Success System, Trading P.I.T., Advanced P.I.T. Training Camp, and Wealth Intelligence Academy.

In real estate, these courses expose wannabe Donald Trumps to the ins and outs of things like flipping properties for profit, property management and cash flow, creative real estate financing, investing in mobile home and recreational vehicle parks, and “rehabbing for profit.” In equities trading, courses go over subjects like technical analysis, hedging and options trading.

Let’s be clear about one thing. Just because I think Whitney Information stock may be a buy based on the cheap valuation and insider buying, it doesn’t mean I am endorsing any of these courses. I have no clue if they are any good, but it’s not my opinion that matters. Over the past five years revenue has grown 38% a year on average, and the company has been in operation since 1992. So apparently somebody likes the seminars.

Business tactics

Whitney Information attracts potential students by running those TV infomercials and newspapers ads for free introductory workshops. It then follows up with aggressive telemarketing to pitch fee-based seminars. Whitney Information has a conversion rate of about 22% -- that’s the number of people at free workshops who pay up for more courses.

Students pay $411 on average for a basic course and $14,000 for an advanced course “package” which can include books or software. Seminars are run out of hotel conference rooms and leased rooms.

Advertising and sales expenses eat up about 30% of revenue – hence the hefty reported cash flow. Sales have been growing faster than costs for the past five years. The company gets most of its revenue in the U.S., but it also has operations in Canada and the United Kingdom.

The insider buying

Besides the reported growth, here’s why I like Whitney Information Network:

Chief executive Russell Whitney recently placed a big bet on his stock’s recovery. And this isn’t just any CEO -- but a successful swing trader at that. Back in February and March of 2006 Whitney sold over $1.8 million worth of his company’s stock for $9.12 and $9.50. The company subsequently ran into troubles which took the stock down as low as $3.10 in mid-December. On the rebound from there, Whitney has purchased over $900,000 at prices ranging from $3.91 to $4.66.
Whitney owns almost 50% of the stock, so he is a true believer in further recovery.
At $4.60, the stock trades at a market cap equivalent to the amount of cash on the balance sheet – or around $54 million. This means you can buy shares and get its line of businesses “for free.”
Whitney Information Network only gets 29% of its revenue from equity market-related seminars. So even if its equity trading seminars are tainted by the EduTrades fiasco, it may not hurt the much bigger real estate seminar business.
The company identifies plausible growth prospects like increasing course offerings, expanding abroad, selling more books and online courses, and developing accredited or licensed proprietary schools, perhaps through acquisition. It certainly has the cash.
Whitney Information Network wants to list on a bigger exchange. That could boost shares, even if these plans may be on hold for the moment given all the recent calamities.

The bottom line: Once again I’d stress that I am not endorsing Whitney Information Network real estate classes or equities trading systems. But given the impressive reported growth numbers and the fact that you can buy that growth “for free,” I’d purchase the stock here. Just limit your exposure because problems like misrepresentation of trading results in one division may have spread elsewhere if the corporate culture allowed it. To paraphrase the market old-timers, where there’s smoke, there actually may be fire. It’s reasonable to suspect there could be more surprises.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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