How To Play A Commodity Rebound With A 5% Yield

Jun.18.12 | About: U.S. Global (GROW)

US Global Investors (NASDAQ:GROW) is an investment advisory firm based out of San Antonio, specializing in natural resource and emerging market stocks. The company operates 13 mutual funds, with focuses ranging from Eastern Europe to gold miners to U.S. municipal bonds.

GROW is currently struggling, as fiscal third-quarter earnings (for the quarter ended March 31) came in well below expectations. Despite first-quarter strength in the broad market, US Global's funds continued to see withdrawals, with assets under management falling to $1.89 billion, down 36% year over year. GROW's net income fell 17% year over year, as lower expenses offset lower fees, but that was enough to knock the stock off by nearly a third in just a week. The stock took another hit in early June, and has recently consolidated near a three-year low, closing Monday at $4.43 per share.

Even at its depressed price, on a fundamental basis GROW doesn't look particularly appealing. Trailing 12-months (TTM) earnings are 22 cents per share, putting the P/E right near 20. Net cash is a healthy $1.35 per share, but even on an enterprise basis the earnings multiple stands at 14.

Those numbers reflect a company that stands in a challenging position in a somewhat cyclical industry. Retail investors continue to withdraw money from equity mutual funds, as they have since 2007. According to US Global's Q3 release, nearly $4 billion was withdrawn from natural resources funds alone between June 2011 and March 2012. Those stocks have struggled as well, despite some strength in commodity prices; gold miner stocks continue to see losses despite a small rise in the price of the gold they mine.

In short, GROW is facing serious headwinds right now; yet its variable-cost model has allowed the company to at least maintain profitability and positive, albeit modest, free cash flow. For a company facing its most challenging period in nearly four years, GROW's multiple doesn't seem particularly outrageous. This is a company that earned 51 cents per share in fiscal 2011, and 35 cents per share in fiscal 2010, as it rebounded strongly from the 2008-09 crash. US Global has been around since 1968 and weathered many financial storms before; its recent performance in the face of new challenges should give long-term investors confidence.

GROW should rebound again. It will no doubt take patience; the retail investor's return has been eagerly awaited for some time now, and the disconnect between gold stocks and gold prices has been going on for at least a year. The company's 2-cents-per-month dividend -- yielding over 5% annually at its current level -- makes waiting easier. While the payout ratio on a TTM basis is over 100%, GROW's net cash covers nearly six years of dividends, lessening payout uncertainty. US Global has paid the dividend without interruption since the summer of 2007, proving its commitment to the dividend policy.

In short, GROW is no doubt struggling, but it continues to be a well-run firm with the ability to control costs and return capital to shareholders. The near-term challenges will abate at some point. In the meantime, the 5% yield and lower entry point makes GROW a good choice for patient, long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.