U.S. Global Investments: An Interesting Gold Play

| About: U.S. Global (GROW)
U.S. Global Investments Inc. (NASDAQ:GROW) is a mutual fund company based in San Antonio, Texas that provides mutual funds that invest in gold, natural resources, and emerging markets. The stock was a high flyer in the recent past having traded as high as $30 per share back in 2007. The company got hit with a succession of bad news that drove the stock down to below $6 a share recently. However I think several things have now changed in the company’s favor that might interest some investors. This company could be an excellent vehicle for playing gold and emerging markets by proxy.
The company is run by Frank Holmes (owns 14% of shares), who is known to many investors and investment conference attendees as a gold, commodity, and emerging market bull. The company currently has two gold funds, a global resource fund, a China fund, an Eastern European fund, and a fund that invests in the "picks and shovels” companies focusing on the global infrastructure build out. In the past these funds have performed very well but were the victim of the worldwide economic crash back in 2008. The emerging market and commodity based funds that U.S. Global Investors specialize in were especially hard hit. As the markets crashed and asset prices collapsed the amount of money under management shrunk and this was exacerbated by fund redemptions. Because the company is a money manager and bases its revenues on assets under management the big drawdown in assets under management had the effect of severely cutting revenues and earnings.
However conditions have recovered in the asset markets and at U.S. Global Investors. On the assets under management front the company had $5.6 billion under management at the end of fiscal 2008, at the end of 2009 the number was $2.15 billion, and the most recent fiscal year ended 6/30/2010 with assets under management of $2.60 billion. These assets under management levels produced earnings of $10.5 million in 2008, a loss of $1.5million in 2009, and profits of $5.5million for the end of fiscal 2010. It appears that the company has turned the corner as earnings are now occurring on an increasing level of assets under management. This is the key to this company as costs are fairly fixed so any increase in assets under management should push earnings higher. There are a couple of other characteristics I like about this company. The company only has a little more than fifteen million shares outstanding and this has stayed fairly consistent over time. In addition the company has no debt and has $23.8 million of cash on the balance sheet. One more attractive quality is that the company currently pays a dividend of $.02 a share paid monthly or $.24 annually which is a current yield of 3.7% and is substantially above the current ten year treasury rate.
A couple of negatives that drove down the share price have dissipated, one being the global financial crisis and the other being that GROW was removed from the Russell indexes back in June. This forced selling of the stock by various indexes decimated the share price and this selling exaggerated the decline due to the small float of shares. I think one more risk to the stock is the proliferation of ETF’s. With so many ETF’S available the ability for the average investor to trade on his laptop could impede the recovery and growth in assets under management that is necessary for the share price to climb. However this is a risk that can easily be watched by paying attention to the company’s reports and tracking assets under management which they report every quarter.
In summary we have the opportunity to buy a proven money management firm at a discount. The growth and interest in gold, resource stocks, and emerging markets is increasing and in the case of gold is on the cusp of possibly entering the mania stage. It would stand to reason that getting paid a 3.7% yield while waiting for a recovery in assets under management at a firm that specializes in gold stock investing would make for an interesting speculation. One other note I would add in closing. The company makes quite a bit of its research available for free on its website and if you interested in gold, commodities, and emerging markets you will find the information informative. Their site is at this link.

Disclosure: Long GROW