A Winner
K-tel International
335.8% Gain
(Nasdaq: KTEL)
www.k-tel.net

12/30/97 Price: 3 5/16 (split-adjusted)
6/30/98 Price: 14 7/16


The Company's Biz. K-tel? Yes, that's right. That K-tel. For the last 35 years K-tel had been the late night peddler of pop hits of yesteryear. Through obscure time slots on obscure independent television stations, K-tel sold its themed music compilations directly to the couch potato consumer. In May the company did an about-face and embraced the hit of the future -- the Internet. K-Tel Express was launched in May and with the same 250,000 title library as its online rivals, not just the dated hit mixes, the company had arrived.

The Story. K-tel had lived a sleepy equity existence until just three months ago. After the market closed on April 9, with the stock at a split-adjusted $3 5/16, the company announced the launch of its K-tel Express website. In the past, the words "K-tel" and "express" seemed misplaced in the same sentence. After all, most people probably remembered the company for that time when a 3 a.m. insomniac buying spree after some bad pizza and a Green Acres marathon found them picking up Sappy Love Songs from the Seventies -- on 8-track.

Site unseen, investors chased this illiquid freight train higher. Illiquid because CEO Philip Kives owned 70% of the company. What was left, the remaining split-adjusted 2 million shares, changed hands quickly and made for wild price swings. In the past, that limited float had kept institutional investor's interest at bay. They knew that buying into the company in large numbers would mean rising prices on the way in and falling prices on the way out.

For investors in that mid-April rush, they just wanted in. The chance to own the next CDnow (Nasdaq: CDNW) or N2K (Nasdaq: NTKI) was too compelling, especially since K-tel had a proven track record and was even profitable at the time. With an easily manipulated float and a deceptively attractive price-to-sales ratio relative to its online competitors (since K-tel had zero Internet sales until May), this was a roller coaster waiting to happen.

And it happened.

How Could You Have Seen This Coming? I imagine we can argue efficient market theories like, well, a broken record, but K-tel telegraphed this catapult two months before the actual run-up. In February the company announced during its quarterly earnings report that it was developing an online business. It was there. It was clear. Yet Wall Street apparently didn't heed the "Act Now, Don't Delay" tagline of K-tel's televised ads. Do the Hustle? Not this time, Daddy-o.

Investors weren't even that immediate to act when the more official April announcement was made. Sure, the stock doubled. But it doubled the next day, too. Then, again.

The fact that the company's CEO owned a majority of the shares outstanding was public knowledge. The low daily volume confirmed the small float. It was easy to figure out how, if there were ever a run on demand, the shares would soar. And, when it came to coattails in this Internet frenzy fashion show, it was easy to see how Internet mania and the small float could feed K-tel's stratospheric rise.

The Future. If you take the time to hit the online music vendors, you may not walk away all that enthusiastic over K-tel's prospects. CDnow and Music Boulevard have more vibrant sites with unique content and competitive prices. They also have exclusive banner ad deals in place for the most popular websites. Then we have the "e-tail" master, Amazon.com, which just opened up the online prerecorded music and video store to complement its book business.

K-tel Express is no bullet train. This is a small engine chugging away, tooting "I Think I Can, I Think I Can." Shortly after the website's debut, the company hosed down the optimists when it frankly discussed the many challenges that lie ahead -- and the vast capital commitment needed to keeping the new site competitive.

That is the reality. This is a company that in just a few days of trading became a ten-bagger, has lost more than half of that since, and in the process is still one of the best performing stocks so far this year. Like orange sorbet in a Diet Sprite, this is a light float. Therefore, either the stock will work its way back into obscurity... or the volatile share swings will continue, and with the dim outlook relative to its better-capitalized peers, probably with a downward bias this time around.

-- Rick Munarriz (TMF Edible)

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