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Rating Change Detail - INTERNET BRANDS, INC. (INET) - 7/31/2010
The stock was downgraded from Some Interest to No Interest on 7/31/2010 by the Small-Cap Growth Investor Strategy based on the principles of the Motley Fool. The score according to this strategy fell from 80% to 67%. A full detailed analysis of INET using this strategy is included below. For a full detailed analysis of INET using 12 proven strategies of Wall Street Legends, take a free trial to Validea.com

Detailed Analysis of INTERNET BRANDS, INC. (INET)

Strategy: Small Cap Growth Investor - Based on: Motley Fool

PROFIT MARGIN: [PASS]

This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. INET's profit margin of 14.17% passes this test.

RELATIVE STRENGTH: [FAIL]

The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. INET, with a relative strength of 80, fails this test.

COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: [FAIL]

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for INET (66.67% for EPS, and 20.84% for Sales) are not good enough to pass.

INSIDER HOLDINGS: [PASS]

INET's insiders should own at least 10% (they own 42.70% ) of the company's outstanding shares which is extremely attractive since the minimum requirement is 10%. A high percentage indicates that the insiders are confident that the company will do well.

CASH FLOW FROM OPERATIONS: [PASS]

A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. INET's free cash flow of $0.53 per share passes this test.

PROFIT MARGIN CONSISTENCY: [PASS]

INET's profit margin has been consistent or even increasing over the past three years (Current year: 12.42%, Last year: 11.11%, Two years ago: 0.34%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.

R&D AS A PERCENTAGE OF SALES: [PASS]

INET is either maintaining the same levels of R&D expenditures(currently $9.6 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependant.

CASH AND CASH EQUIVALENTS: [PASS]

INET's level of cash $60.1 million passes this criteria. If a company is a cash generator, like INET, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.

ACCOUNT RECEIVABLE TO SALES: [PASS]

This methodology wants to make sure that a company's accounts receivable do not get significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for INET was 15.72% last year, while for this year it is 15.46%. Since the AR to sales is decreasing by -0.26% the stock passes this criterion.

LONG TERM DEBT/EQUITY RATIO: [PASS]

INET's trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don't need to borrow money in order to grow.

"THE FOOL RATIO" (P/E TO GROWTH): [FAIL]

The "Fool Ratio" is an extremely important aspect of this analysis. The methodology says consider shorting shares when the company's Fool Ratio is greater than 1.30. INET's PEG Ratio of 3.31 is excessively high.

The following criteria for INET are less important which means you would place less emphasis on them when making your investment decision using this strategy:

AVERAGE SHARES OUTSTANDING: [PASS]

INET has not been significantly increasing the number of shares outstanding within recent years which is a good sign. INET currently has 48.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.

SALES: [PASS]

Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find "an uncut gem", ones that institutions won't be able to buy yet. INET's sales of $107.5 million based on trailing 12 month sales, are fine, making this company one such "prospective gem". INET passes the sales test.

DAILY DOLLAR VOLUME: [PASS]

INET passes the Daily Dollar Volume (DDV of $1.3 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions. "You'll be scoring touchdowns against the big guys on your turf."

PRICE: [PASS]

This is a very insignificant criterion for this methodology. But basically, low prices are chosen because "small numbers multiply more rapidly than large ones" and the potential for big returns expands. INET with a price of $10.98 passes the price test. The price should be above $7 in order to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.

INCOME TAX PERCENTAGE: [PASS]

INET's income tax paid expressed as a percentage of pretax income this year was (37.80%) and last year (41.38%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid. This is a concern.

For a full detailed analysis of INET using 12 proven strategies of Wall Street Legends,
take a free trial to Validea.com

Rating Change Detail - INTERNET BRANDS, INC. (INET) - 7/31/2010

Detailed Analysis of INTERNET BRANDS, INC. (INET)

Strategy: Small Cap Growth Investor - Based on: Motley Fool