Assets Under Management AUM

US global investors: positive external factors combined with its new ETF

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Investment thesis

U.S. Global Investors, Inc. (NASDAQ: GROW) has shifted slightly into the crypto space with several investments in crypto-related companies. Despite this change, GROW is a stable asset manager with reliable monthly dividends and 3 passive ETFs. In addition, external economic factors are turning in favor of GROW. Management’s aggressive stock buyback program further supports the undervalued stock theory. With the company trading very close to its 52 week low range, I think this is a buying opportunity.

business model

GROW mainly provides its services to investment companies and also provides its services to retail investors through ETFs. The firm also manages equity and fixed income mutual funds for its clients. GROW manages eight mutual funds and three ETFs traded in the United States: US Global Jets ETF (JETS), US Global GO GOLD and Precious Metal Miners ETF (GOAU) and US Global Sea to Sky Cargo ETF (SEA). In 2017, the company also made a strategic investment in Toronto-based HIVE Blockchain Technologies (HIVE), and with the wider acceptance of cryptocurrencies, this investment will continue to pay off in the long term. The Company’s operating revenue is derived from investment advice and administrative services provided to clients. Their actively managed funds are slowly but steadily declining, but their ETFs have a bright future. The vast majority of the company’s revenue comes from 2 ETF fees. (The third just launched with an AUM of just over $5 million so far.)

Positive External Factors and Crypto Investments

External economic factors are turning in favor of GROW, with more countries opening their borders post-pandemic and lifting travel restrictions. Due to these regulations, the airline industry began to recover and this recovery had a significant effect on GROW’s JETS ETF. Rising interest rates and high inflation are also working in favor of GROW. “This may seem counter-intuitive as gold generates no income, but the yellow metal has performed well in rising rate environments – Frank Holmes, CEO and CIO.” This will most likely mean more inflows into its Gold and Precious Metal Miners ETF. In addition, the conflict in Ukraine has further increased the demand for safe havens such as gold and has also pushed up prices.

GROW has also invested in the cryptocurrency world through HIVE Blockchain Technologies. This investment had a brilliant return in 2021 but the future is uncertain and volatile as with any crypto asset. One thing is clear: the CEO of GROW believes in going the crypto route and because HIVE has massive mining capabilities, it can remain profitable despite Ethereum 2.0 changes (Ethereum will soon no longer be available to mine ). The company also announced that it had purchased 1 million shares of Network Entertainment, Inc. (Network). This investment aims to provide exposure to Network’s emerging non-fungible token (NFT) business. Additionally, GROW continues to attract investors and positive flows to its 3 ETFs. With the airline industry slowly recovering, more capital can be expected to flow into GROW’s JETS ETF in 2022, which forms the backbone of the company’s earnings.

US Global Investors also launched a brand new ETF on January 20, 2022, the US Global Sea to Sky Cargo ETF. This ETF mainly invests in shares of companies operating in freight, transport and logistics. Additionally, the collaboration with HANetf has helped GROW register JETS in the EU market as well, which will help increase its AUM. (In the EU, all ETFs must have special KID documentation and be registered as Undertakings for Collective Investment in Transferable Securities: UCITS, to be available to retail investors).

GROW valuation

Based on a simple DCF model and GROW’s dividend yield, the stock is undervalued. In addition, the fundamentals make the company more attractive with a new launch of ETFs and positive external economic factors in their favour. For the calculations, I used Graham’s DCF model. To see real intrinsic value, I’ve also added all the crypto assets that can transform GROW from a traditional investment manager into a lightly crypto-related company. Let’s look at the intrinsic value: for the last 4 quarters, I used a more realistic number than the EPS ttm which was $1.28 because it is only a temporary peak in the history of the company, j so I used $0.2. To the expected growth rate, I added a moderate 5% due to choppy crypto price movements and new ETF launch spending. Put all this data together and we can have an intrinsic value for GROW stocks between $7.2 and $7.5. I think that’s a realistic longer-term number with his new ETF, favorable external conditions, and all of his crypto-related investments.

Additionally, GROW is trading at a relatively high dividend yield over the past 12 months, further confirming the undervalued stock theory. You could only buy GROW above 1.5% dividend yield about 4% of the time over the past 12 months.

Chart
Data by YCharts

Company specific risks

The company competes with a large number of investment management firms, commercial banks, brokers, insurance companies and other financial institutions and most of its peers are larger ETF providers with a much larger capital. Average ETF fees in the US have fallen by around 40% over the past eight years. According to a study by the Financial Times in 2021, management fees for exchange-traded funds have stopped falling and in some cases have started to rise for the first time in a decade, but I still don’t think it is. Acts only of a small upward trend in the steady decline of fees. Since GROW recognizes more than 80% of its revenue from ETF advisory fees, lowering these fees can seriously hurt the company’s bottom line and profit margins. The average Precious Metal ETF expense ratio is 0.49% based on 24 precious metal ETFs available in the US market. GROW’s ETF expense ratio is 0.6%, which is above average and investors can choose the cheapest options when investing in gold.

A significant amount of assets under management is concentrated in the US Global Jets ETF (82% and 35% of average net assets for fiscal years 2021 and 2020). Consequently, the company’s revenues followed a similar trend of concentration (76% and 33% of total operating revenues for fiscal years 2021 and 2020). Accordingly, their results of operations are particularly dependent on the performance of a fund and their ability to maintain and grow the assets under management of that fund. If this fund were to experience a significant decline in market value or redemptions, GROW’s assets under management would be reduced, which would negatively affect its earnings. To combat this concentration, the company has successfully launched a new ETF, but its AUM is still tiny compared to JETS.

As the company moves ever deeper into the crypto world, a potential longer-term decline in major crypto asset prices can have a significant influence on the stock price. Not on profitability as major revenue streams are away from crypto, but overall growth estimates may drop and speculative traders may cash in on the stock.

My take on the GROW dividend

Current dividend

GROW has been paying consecutive dividends for 14 years on a monthly basis compared to the industry median of 13 years. Management made a massive reduction in 2013 lowering the dividend from $0.24 per share per year to $0.06 per share and now they are trying to rebuild the dividend with 2 increases in the last year. I also expect an increase in the dividend at the end of 2022 with the growth of the AUM in JETS ETF and positive inflows in their gold ETF. GROW is yielding 1.58%, which is not a very attractive dividend yield for income investors, even with a potential increase in 2022. Comparing this yield to the current dividend yield of the S&P 500, we can see a slight difference with the S&P 500 which yields 1.37%. GROW might be more attractive to growth investors due to its profitable ETFs and investments in the crypto world.

Future sustainability

GROW has a stable and secure dividend and plenty of room to grow its future payouts. Their dividend payout ratio is very low compared to all GROW peers. I expect a dividend increase in the second half of 2022 based on its opportunities to increase the dividend. Furthermore, the company is in a relatively good position for the general trend and future growing demand for passive investment vehicles.

GROW dividend payout ratio

The table is created by the author. All figures are taken from the company’s financial statements and SA earnings estimates.

Summary

GROW may be a potential target for growth investors who want exposure to the crypto mining and NFT sector, but with the guarantees of a traditional asset manager. The majority of the company’s revenue comes from its 2 ETFs (at the moment) and has several other funds like the recently launched third ETF. Almost all external economic factors turn in favor of GROW. Rising interest rates and high inflation are supportive for its Gold Miners ETF, the lifting of travel restrictions is supportive for its JETS ETF while supply chain disruptions are supportive for its new ETF due to soaring logistics prices. I believe that those willing to buy and hold the stock for years to come could see significant stock price appreciation.