“The Secret Real Estate Rocket”

by Travis Johnson, Stock Gumshoe | August 15, 2007 6:28 pm

When the Motley Fool[1] Hidden Gems[2] newsletter sends out a teaser email, I always pay attention — not only because I was a subscriber to that service a few years ago and generally liked the newsletter, but because it has recently ranked as the best newsletter in the country, according to Hulbert … and that’s saying something, though of course it doesn’t spin all of their picks into gold[3].

So what are they sending around now? And can we sniff it out without coughing up the $199 Tom Gardner[4] charges these days?

“The Real Estate Rocket (yes, real estate[5]!) No One’s Telling You About … you’ve heard all about the housing industry distress, the subprime crisis, the increasing mortgage delinquency and foreclosure rates. But there’s another side to real estate no one’s telling you about.”

That’s the big tease for you — this is a real estate company, but it’s related to commercial real estate, which hasn’t (yet?) hit the kind of problems that we’ve seen sinking mortgage lenders, homeowners, and banks.

Apparently they’ve recommended this stock as their top pick three times in the last four months. Sounds like a pretty strong focus for one stock, a little unusual.

So what other clues do we get in the (very long, naturally) email ad?

This company runs a website that helps people buy and sell (rent and lease, whatever) office space. The Fool calls it the “Match.com of commercial real estate.”

The company website has 2.2 million registered users (hah! The Gumshoe’s Mighty Irregulars[6] could take ’em! Oh, wait … that’s MILLION. I take it back. We surrender.)

Had 900,000 unique visitors in June.

566,000 properties listed ($440 billion worth for sale).

Users provide the content, and pay a monthly fee — so this must be very scalable, and pretty high margin.

Currently has 88,000 premium members paying “roughly $51 a month” to gain access to the most valuable information.

Revenue is about $50 million, revenue growth for the past three years has beeen 6.5% a year.

Operating margins are improving.

So, that’s a whole mess o’ clues .. should only take a few moments in the researchifier and we find that this company is …

LoopNet, Inc. (LOOP)

All the financials match, and it does indeed have 2.2 million registered users … pretty close to the number of “residents” of Second Life, to give you some perspective. I’ve never used either one and I own neither a virtual avatar nor any commercial real estate, so my expertise ends there.

This is indeed essentially an online commercial real estate marketplace, not too different from an eBay, or from a souped-up commercial version of the residential listing database that our realtors used when we bought our homes.

At a forward PE of 32, this seems a little pricey for a Hidden Gems stock, but the small cap service, though it has a reputation for value stock picking, does choose some fast growers as well … as long as they’re little.

And this one is pretty small, a market cap just around $750 million. They do have nice, beefy profit margins, and no debt, and with the numbers the analysts are pegging in for growth we get a forward PEG (price/earnings ration divided by growth rate) of about one and a half … not screaming buy land, but noth terribly expensive either. Again, that relies on the analyst numbers … and the analysts are getting a little more accurate with this one, LOOP has consistently surprised on the upside with earnings, but only by 8% last time they reported (compared to 44% last Winter). There have been pretty equal numbers of analysts upgrading and downgrading the numbers in the last few months, so maybe they’re still a bit confused, who knows.

Myself, I’m a little unsure of how to value this one – even though it’s essentially in commercial real estate, which indeed has so far been somewhat shielded from the subprime mess, I can’t imagine that a global debt freeze like we’re mired in now, at least temporarily, is good for deal volumes in any kind of real estate. People will always need offices, at least for the foreseeable future, but I don’t have a a handle on how much a smallish move up or down in commercial lease activity would impact LOOP.

Probably because I’m not sure how they make money — I assume it’s a listing fee of some kind, in addition to the premium memberships. That’s probably a decent thing to research a bit before jumping on this one, if you’re at all so inclined. They also have a much smaller business called BizBuySell that operates as an online marketplace for businesses, which also sounds pretty interesting, though I know even less about business brokers than I do about real estate brokers.

For what it’s worth, if Hidden Gems is as big as it seems there are at least thousands of subscribers who have probably bought this one in the last few months and want to hold on tight to it if the drum is being beat this loud for LOOP … what that means for investors who aren’t in the club, I don’t know.

In recent news, LoopNet just bought their biggest competitor CityFeet, which, in addition to the 100,000 listings CityFeet brought in, means that they also get a more robust new distribution network for real estate listings that includes many of the biggest newspapers in the country … at first blush, that sounds like a genius deal to me, though I don’t know if they paid a fair price or not. According to the releases, this is expected to cost them two cents on EPS this year, it was a fairly small acquisition at $15 million.

Definitely worth reading up on a bit more if you’re interested and not totally terrified of everything related to real estate — let us know what you think.

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