The Tycoon Report

Is there money to be made in a small-cap tech stock? Of course there is. Wait until you see this diamond in the rough.

How goes it, folks? As for me, I’m just trying to get used to this nasty winter weather we’ve been having here in the Big Apple. But I think I found something to get me warm again -- a nice HOT stock.

I hate to use the term -- it’s so cliché -- but in this case it’s definitely called for. How many of you have heard of a company by the name of United Online (SYM: UNTD)? Most of you are probably scratching your heads at this point.

Let me ask the question again, but this time I’ll refer to one of the company’s operating divisions ... How many of you have heard of NetZero, Juno, or Classmates.com? If you haven’t heard of, or at some point were a registered user of, at least one of these companies, you need to start getting online more!

United Online is the result of a 2001 merger between Internet E-mail Service Providers Juno and NetZero, respectively. For those of you who remember, Juno was one of the first free e-mail services and NetZero was the first free ISP. The interesting thing was that neither of those companies had ever turned a profit -- at the time, profits were so unfashionable, anyway, so you can’t really blame them (can you detect the sarcasm in my voice?). But after the merger, this company has become extremely profitable!

Its earned profit net margins are over 20 percent. That means that for every $1 in sales the company does, it brings 20 cents to the bottom line. That compares with 10 cents in profit for the average company in the S & P 500. Even more impressive is the company's Return on Invested Capital (ROIC). The average company in America has an ROIC of 12 percent. That means that for each $1,000 it invests into its business, it earns back $120 in profits. But United Online has an ROIC of a stunning 36 percent! So for every $1,000 they invest into their business they get back $360 in profits.

Before I get into more financial highlights, I want to briefly discuss the business behind the stock ... The majority of United’s revenue comes from its internet access business ... about 58% to be exact. The company primarily focuses on dial-up access, which is a declining industry and definitely leaves it vulnerable. It does, however, have a dial-up accelerator service, but that has been facing pricing competition from DSL providers lately.

We all know that the dial-up Internet business has one foot in the grave and the other on a banana peel. On the brighter side though, the company inked a deal with communications titan (and Fallen Angel Stocks favorite) Comcast Corp. earlier this year to begin providing High-Speed access to its customers. In my opinion, this definitely bolsters the company’s competitive position in the ISP space.

Now here's where it gets a bit more interesting: Ever heard of the website Classmates.com? It's that popular website that shows Barbara Billingsly-type pictures of women with pearls around their necks? Well, about 30% of United Online’s revenue comes from subscriptions to the its online services such as Classmates.com. So they're at the forefront of the boom in wildly popular social networking sites, which have spawned a number of other related sites as well as a reality show.

The company also owns a number of other, smaller web destinations that generate 10% of their total revenue from advertisements. The diversification in revenue streams is definitely encouraging. All of this aside, there are a number of financial characteristics that get me really excited about this stock.

First of all, the company has about $240 million in cash and short-term investments. You may be shrugging your shoulders and saying, “So what, Wayne, that’s not a lot of cash?” You may be right, but consider that the company only has a market capitalization of $888 million (trading at 3.7 X cash). That means you’re only paying $650 million for a company that’s expected to do $45 million in earnings this year -- that gives us a P/E of 14. That's a P/E of 14 on a company that's growing by leaps and bounds and has an ROIC of 36%! Unheard of!

The company is still showing solid top-line revenue growth while keeping costs in line. United has a bit of debt -- not enough to be troubling -- and generates more than enough cash flow to cover the interest and principal. Now get this: The company is also paying a healthy dividend of $0.40 per share -- roughly 5.6%! And we all know how rare that is for a technology company.

United has millions of paying subscribers, not to mention several million non-paying subscribers who they can market to. The company is aggressive in signing up new users for a range of its businesses -- and with almost a quarter of a billion dollars in the bank, it can definitely afford to make some smart acquisitions to further diversify revenue. At roughly $14 per share, a ton of cash, a strong brand name and a strong management team -- United Online is the perfect speculative play in the consumer technology space to round out your portfolio. Especially after the stock aggressively bounced off its low of $8.50 earlier this year, there are only blue skies ahead.

And if the stock trades sideways for a while, you’ll be a little bored while you sit on a 5.6% yield waiting for it to trade higher. Like money in the bank with a ton of upside!