Sunday, February 20, 2011

An Idea: WisdomTree Investments


WisdomTree Investments (WSDT). This Company's stock is by and large ignored as an investment given its present trading status in the Pink Sheets. However, it presents a significant growth opportunity as the only available pure play, and is fast becoming a major factor, in a new growth industry. The industry it operates in is ETF sponsorship and management

WisdomTree was basically jump started when CEO Jonathan Steinberg who had the idea sought some financial help about five years. Some may recall he originally ran an investment media firm called Individual Investor Group in the late 1980s and early 1990s. He may actually be best known as the son of  Saul Steinberg, who once tried to take over the Chemical Bank, or  as the husband of CNBC's Maria Bartiromo. He approached famed hedge fund manager Michael Steinhardt, now WSDTs Chairman, who saw merit in his idea and invested.

Five years' ago WSDT had no ETF assets. In 2008 it had $3.2 billion (that's billion with a "b"). In 2009 its ETF assets under management (AUM) were nearly $6.5 billion and last year the AUM grew to $9.9 billion. Last night( the company had $10.1 billion in ETF assets, $446 million of  YTD ETF inflows and had  another $751 million in mutual fund assets. Nearly $11 billion all told.

WisdomTree is now the eighth largest ETF manager in the world and about the fastest growing of the bunch ahead of it. The industry reached AUM of over a $trillion at the end of last year, nearly double the funds managed just two years earlier in 2008 and more than triple AUM five years earlier. Clearly it is a rapidly growing business.

There are many reasons to believe ETFs will eventually overtake the $11.8 trillion in mutual fund AUM. I believe WisdomTree will keep growing, and rapidly, as it slices and dices new niche ETF Funds in the range of many hundreds of millions to several billions of assets while the big three which focus on huge broad market ETFs, and in the fullness of time is likely to become "acquisition food" for one of the top issuers at a meaningful % of AUM price. Meanwhile there is no reason not to expect that WisdomTree will not increase its market share from the present 1% at least to several percentage points of the rapidly ETF market.

WisdomTree has demonstrated an ability to grow assets under management rapidly. It has a high year-over-year growth potential by virtue of a) rapid industry growth and b) potential to increase its market share of that growth.  The company is highly focused on continuing its a AUM growth . The company expects to be GAAP profitable very soon. It is cash flow positive. Its revenues which currently amount to .57% of a AUM are growing. Its balance sheet is rather pristine. Cash equivalent is three quarters of its $29 million in total assets. It has no debt. It has a net worth just over 17 million and a substantial negative and $142 million retained earnings deficit, meaning a material tax loss carry forward. The company recently turned cash flow positive.

But the name of the game to enhance shareholder value is the rapid buildup of AUM. WisdomTree management is highly focused on accomplishing this. The end game will be its value as an acquisition very possibly by one of the top three or four or another strategic acquirer seeking to enter the ETF business. An acquirer will most likely be one that is a marketing machine such as an existing ETF manager interested in getting into the ETF niche fund markets or a strategic money management company merely desiring entry into the ETF business. There are many such that excel at offering mutual funds but have no ETF business. One reason it will be an attractive acquisition is that most managements in the investment management business are well aware of the difficulty of entering the ETF business, not only because they recognize how well-established the leaders are, but because there definitely is a first mover advantage to any ETF becoming the leading fund accruing assets and liquidity in any particular category. Number two might do okay but numbers three and four etc. are normally only also ran's. Number one stays number one and grows too.

One might chose to apply a high P/E Ratio to a rapidly growing company, such as for example 20 to even 30 x 2012 eps, which on my estimate of about 30c would suggest a stock price of $6 - $9. However, I would much prefer to estimate WSDT value based on AUM. Last year at BlackRock acquired iShares from Barclays and early in the game in 2006 IVZ bought PowerShares. The latter paid 7% of AUM. Applying this to today's AUM the valuation is about the current market valuation of $700 million. I believe all the focus of Chairman Steinhardt who is the largest shareholder, with somewhere in excess of 40% of the shares, and the operating management team is solely focused on as rapidly and as big as possible to build AUM. Heavy marketing expenses and employee stock compensation has meant no GAPP profits to date. We will see such in due course but the real value of the WSDT enterprise will come eventually from the sale of the company. The buyer will be able to let most all of the management go and unleash its own marketing machine to selling the ETF funds.

I believe savvy Mr. Steinhardt suffers no fools and will eventually push for a sale at the appropriate time. He has too large a position to just sell his shares. Growing AUM as big and as fast as possible is the name of his game. That is all that's all that counts here. And those AUM will be valued on the basis of a lofty percentage. I believe WSDT is of growing importance to Mr. Steinhardt and despite his substantial wealth WSDT, now worth north of $300 million to his NW, can easily become his key asset. When he believes growing AUM at WSDT will become a sticky wicket he will encourage the sale of the company of AUM of triple or even much more than those of today, and that a price valuation potentially of a hefty AUM % premium of as much as 7% is in the cards.

There is a great likelihood of WSDT increasing its market share in what is very clearly a rapidly growing industry and that WSDT could double and triple and more its assets in a reasonable number of years even without increasing its market share. Bear in mind India for example is not yet included in the MSCI World Index. It will be in time as India is an economy that all globally thinking investment  advisors will recommend holding a position in. Such an ETF could easily have many tens of billions in it and indeed $100 billion in it would not be farfetched or out of the question. WSDT has the leading India ETF, the Wisdom Tree India Earnings Fund (EPI). The fund has what is considered a long track record (three years) and is the largest India Fund ETF on the planet today. Yet at the moment it is small with only about$1.4 billion in assets this day.  As the first mover it is the leading candidate to become quite large in time. Probably quite so.

Soon enough WSDT will become registered with the SEC and listed on an exchange is will leave category of basis Pink Sheet's investor neglect and emerge from the shadows of the marketplace  to a degree of notoriety which by itself  is a normal and usual catalyst for value Other facts are WSDT is the only pure ETF pay in the extremely rapidly growing ETF business, it is likely to increase market share, it is financially sound, it will soon be reporting GAAP positive earnings, its AUM the key driver of value is growing very fast and the principal shareholder is a proven, successful, no nonsense money maker of historic proportion.


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