Based on my analysis of U.S. Global's (NASDAQ:GROW) recent 10-Q (found here), I calculate U.S. Global's net asset value (NAV) to be approximately one half of its current market cap and enterprise value.
Background To The Trade
U.S. Global is an uncovered, micro-cap mutual fund company that was range-bound from $1-$2 per share ($15m-$30m market cap) for the last few years with about its entire market cap in cash (no debt). The company runs half a dozen mutual funds and an ETF (NYSEARCA:JETS) where it primarily invests in commodities (gold, etc.), commodity miners, and some EM equities. By the end of 2015, U.S. Global’s mutual funds had approximately $525m in AUM and took an average fee of about 75 bps.
Total AUM was about 700-800m when including assets in the ETF. AUM had shrunk considerably over the past few years as the funds’ performance has been sub-par and overall mutual fund flows have not been great. While the stock remained range-bound, I found it very interesting as the Enterprise Value was ~$0, it was uncovered by Wall Street, and AUM had the potential to hit an inflection point and bottom out as its invested end markets gained more traction. I began to track AUM on a quarterly basis and waited for it to turn upwards.
Starting in September 2017, the stock broke out and began to make new highs (+300% in 2 months); however, it was not due to a large increase in AUM and potential future earnings power. In September 2017, U.S. Global made a large investment in a Canadian-traded, public Blockchain Technology company called Hive Blockchain Technologies (TSX:HIVE and ADR: OTCPK:HVBTF). According to public filings, U.S. Global bought about 17 million shares, some of which are restricted for a year until January 2018. According to Hive, they are:
“The First publicly listed blockchain infrastructure company that bridges blockchain and cryptocurrencies to traditional capital markets.”
In reality, Hive is a large cryptocurrency miner, which gets paid a fraction of the digital asset for verifying transactions. Since its first day of trading in September, Hive’s stock price went from about $0.50 to ~$3.50 currently, bringing its market cap to approximately $1 billion. Since U.S. Global owns 17 million shares of HIVE, and has 15.2 million shares outstanding, a $1 change in underlying Hive should impact U.S. Global's stock price by approximately $1.1.
Over the first few months, U.S. Global had “followed” Hive almost exactly. Whenever Hive makes a move, U.S. Global makes the same move, just slightly later. This is because U.S. Global's Enterprise Value was $0 before the transaction and now 100% of U.S. Global's value is its shares in Hive. Investors can watch Hive and then a few minutes to an hour later, U.S. Global will make a very similar move (both up and down). Unfortunately, Hive is not borrowable and cannot be shorted, so the best opportunity is to wait for the spread of the two to widen and then to simply go long U.S. Global and “watch” Hive for an inflection point.
- Short U.S. Global/”Watch” HVBTF
While investors may have different views on cryptocurrencies and their potential value, this trade does not take a stance and generates alpha regardless of whether cryptos continue to do well. Since U.S. Global is a micro-cap ($<50m) and not covered by the Street, there are few players out there who are familiar with the situation and arb it out. Also, I believe U.S. Global will have to pay 20% capital gains tax on its monetization of Hive, so I am being conservative.
U.S. Global's NAV
- Prior Enterprise Value = $0
- 17 million shares of Hive @ $1 per share (Hive’s market price currently) = $17m
- U.S. Global's estimated “fair value” NAV: $17m
- U.S. Global's Current Market Cap: $35m
As you can see, U.S. Global has been trading down but its current market cap is still $35m ($25m EV), which I believe is 2x its fair value. U.S. Global at this point is simply a call option on cryptocurrency and HIVE in case they have a sharp rebound. Importantly, U.S. Global is a cheap borrow and has options.
Relevant catalysts for investors to watch are movements in the underlying crypto market as well as the widening spread between U.S. Global and Hive.
Disclosure: I am/we are short GROW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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