Some of the fastest growing stocks in recent years, such as Family Dollar (FDO) and Dollar General (DG), have been discount retailers. A discount retailer generates profits by selling large volumes of merchandise to customers at the lowest cost possible. Family Dollar and Dollar General also target low income shoppers that are often neglected by traditional retailers.
I’ve discovered a company that is trying to apply a similar business model to another fast-growing industry. The company is SaveDaily (SAVY), and the industry is online banking and investment. SaveDaily is applying the discounting model to online investment and banking, and unlike most brokerages, it is targeting smaller investors.
Like Family Dollar, SaveDaily has a simple business model. It allows anybody to set up a mutual fund investment account with no minimum investment and no required income or activity levels. That means anybody regardless of income can set up an account and invest in mutual funds through it. The individual can manage the account online and access it through his or her checking account.
The investors will be able to buy nationally known mutual funds through automatic investment from checking accounts. Investors will be able to set up the accounts directly or through brokerages and traditional financial institutions such as banks.
Like Family Dollar and Wal-Mart (WMT), SaveDaily plans to reduce costs by high volume purchasing. It pools large numbers of small investments to make large purchases, which will reducing operating costs and increase earnings per share. That eliminates the need for minimum investments and greatly increases the potential customer base.
SaveDaily has also developed proprietary accounting software that should reduce costs because it handles all the paperwork related to the transaction. That would allow a local bank or credit union to offer all of its accountholders access to mutual fund investments without incurring any additional costs. This platform will be offered directly to customers online and financial institutions such as banks and credit unions.
Similarity to mREITS
SaveDaily is also taking advantage of what Albert Einstein called the most powerful force in the universe” — compound interest. Small amounts of funds will be taken out of thousands or tens of thousands of small bank accounts at once and invested in mutual funds. This should give SaveDaily enormous amounts of leverage that it can use to get even better rates and more discounts out of major mutual fund operators.
This business model is similar to that employed by mortgage Real Estate Investment Trust (mREIT) companies such as Annaly Capital (NLY) and American Capital Agency (AGNC). These have some of the fastest growing stocks in recent years and they are well known for paying high dividends.
Posed to Tap Growing Banking Market
The real interesting thing about SaveDaily is that it is entering a growing market where other firms are succeeding. EverBank Financial (EVER) has been successful by offering traditional banking products such as CDs online. Unlike SaveDaily, EverBank is a bank that offers accounts, but its appeal is primarily to investors. EverBank has generated solid earnings per share of 36 cents ,and its share value remained constant for the 52 weeks ending on June 29, 2012.
It is real easy to see that SaveDaily could show similar performance to EverBank. SaveDaily’s share value might one day exceed EverBank because its potential customer base is larger. EverBank is basically targeting middle class people who are dissatisfied with brick and mortar banks. Save Daily is targeting both online customers and traditional bank customers.
Its strategy of offering services directly through banks will enable it to reach large numbers of people that do not use brokers. Banks would use SaveDaily because they can offer its products under their own name.
SaveDaily can also offer a high interest/high return investment product associated with a traditional checking account. Many people will be looking for alternatives to traditional bank products, such as savings accounts, CDs, and money markets because of low interest rates. Much of EverBank’s success has come from its ability to offer foreign-currency CDs that offer a higher interest rate than traditional CDs.
It also has the advantage of being able to market through brick and mortar banks. Many customers dislike not being to work with a bank in their community.
By working through local banks, SaveDaily can take advantage of many of their services, including free checking and no ATM fees. That way, it can directly address one of the major concerns of lower income customers the ability to quickly get cash from an investment account in an emergency.
A doctor or a lawyer with a large amount of cash in her checking account doesn’t need to worry about accessing investment funds quickly. A secretary may need to pull some money out of her mutual fund quickly to pay for car or home repairs. Save Daily has created a product that would allow the secretary to do that, so it has overcome one of the traditional barriers to selling investments to the working class.
This puts it in competition with ING Direct, now owned by Capital One Financial (COF), which has tried to offer a similar service through its Orange Savings accounts. The big limitation to ING Direct is that it can be hard for lower-income individuals to withdraw cash from accounts.
ING does have some advantages over SaveDaily that will give it an edge. The biggest of these is that it offers a wider variety of investments, including stocks and ETFs. Its product is more likely the traditional investment or money market accounts offered by investment banks. Save Daily’s product offers a limited range of basic investments that could cost it some market share.
SaveDaily in Position to Tap Credit Union Market
SaveDaily’s biggest potential market could be credit union members. Credit unions would seem to be a natural venue for SaveDaily because they serve primarily middle and working class customers that do not use other financial service providers. Many credit union members are dissatisfied with the providers of traditional financial services; they want simple financial products that they can control themselves. SaveDaily is certainly offering such a product.
Credit union membership in the United States is growing. The National Credit Union Administration estimated that 92.5 million Americans are now credit union members. Credit unions were able to sign up around 667,000 new members nationwide in the first quarter of 2012 alone. Credit unions control $40 billion in assets, and their members have $100 billion in earnings.
You can obviously see where this is going. If just 5 or 10 percent of credit union members sign up with SaveDaily, it could control several billions dollars’ worth of assets. That means this little stock has some serious growth potential.
SaveDaily could be one of those companies in the right place at the right time. It has developed a platform that can offer banks and credit unions an added service at little additional cost, and at a time when they face intense competition from online bankers such as ING, EverBank, and Ally Bank. It also offers dissatisfied investors an alternative to traditional brokerages and bank customers an alternative to low interest rates.
By bringing discounting to mutual funds and banking, SaveDaily might have just discovered a means of generating a lot of cash fast. This could be the value stock to watch for 2012.
Transparency/Disclaimer: I received $150 from a third party shareholder to write this article. I’ve done my own due diligence, but my due diligence is not a substitute for your own.