08/05/13 Covered Call Pick: WisdomTree Investments (NASDAQ:WETF)
WisdomTree Investments (WETF) is an asset management services company that sponsors exchange-traded funds (ETFs) on the New York Stock Exchange. Launching its first ETFs in 2006, WisdomTree is currently the fifth largest ETF provider in the country with over 50 distinct ETFs spanning asset classes, industries, and countries from around the world. With over $29 billion in assets under management, WisdomTree is the industry pioneer and leader in fundamentally weighted and actively managed ETFs.
WisdomTree Investments has a market capitalization of $1.68 billion with 127.7 million outstanding shares.
WETF currently does not pay a dividend.
With a beta of 1.69, WETF trades with approximately 70% more volatility than the current market.
WisdomTree Investments definitely breaks our usual mold for Covered Call recommendations we normally make on this blog. The stock doesn't pay any dividend, has a low market capitalization, and has a high beta. Additionally, it is also an investment management company, something that we don't normally deal with in terms of recommendations. While today's Covered Call Pick isn't for every investor, if your risk tolerance allows for it, and you are bullish on the stock market, than WETF is a fine investment to make.
This is because WETF's investments provided to the public are ETFs, Exchange-Traded Funds. Our article, Understanding ETFs, gives a simple rundown of what ETFs are. For a quick review, ETFs are packaged products that involve a basket of investments and that are actively traded on the exchanges similar to a stock. They normally have a specifically defined investment thesis behind them, such as tracking a specific average, industry group, or investment philosophy. ETFs have become increasingly popular in the last few years, and the data does not show that their popularity is going to slow anytime soon. In 2012, a record $191 billion was estimated to flow into ETFs. This year saw this pace accelerate, with July seeing nearly $41 billion flow into equity ETFs. As the retail investors continue to slowly step off the sidelines and into the market as they see strength returning to our economy and equity returns continue to rise, they will most likely NOT stock pick, but rather invest in ETFs. Let's be frank, the average retail investor that is not hiring a professional portfolio manager, rarely has the time to do the proper due diligence behind every stock pick they would need for a properly diversified portfolio. ETFs provide a (generally) low-cost investment option to easily diversify and participate in the markets for the average investor. As confidence continues to return to the retail investor and bond yields are destined to rise, we expect flows into equity funds to continue to increase, and WisdomTree will continue to profit.
WisdomTree Investments were the first to introduce and provide fundamentally-weighted ETFs, and actively managed ETFs. Both types of ETFs allow for a more professional touch on the composition of the investments inside the ETF, which we believe result in better performance and risk management for the investor. Money managers can be extremely costly, so to have the ability to have your investments managed by a professional in the form of an ETF, while keeping costs to a minimum is extremely attractive for the individual investor. WETF was the first to introduce this concept to the market, and they are the industry leaders in providing these products to the consumer.
The stock itself has a lot of the hallmarks of a growth stock - and coincidentally, metrics that would normally make us cringe, but are good for the purposes of this investment. Both P/E and Book Value are well above "normal" levels we see for many of our recommendations, but are what you would expect from a growth stock. The company recently reported Q2 earnings and met EPS estimates of $0.09, and beat on revenue by $0.03 million. What is more important are the growth statistics: revenue was up 27.3% from Q1 and 83.4% from last year. Net income also increased quarter-over-quarter and year-over-year, as did pre-tax margins. Net inflows were up to $5 billion, an increase of $300 million over last year, with ETF assets reaching $29 billion, an increase of over 93% from last year. All of this helps promote the great growth that WisdomTree is showing. We believe this growth will continue as individuals take money out of bonds and invest in equities, helping to continue to bolster the stock markets and make ETF participation attractive. For a Covered Call Strategy on WETF, we are looking to for an out-of-the-money Call to take advantage of the growth potential in the stock, but with a decent enough premium so we get paid for our time in the investment. We also recommend buying more than one round lot of the stock, as the price for the stock is relatively low. That is why we are recommending buying WETF and selling the March 2014 $15 out-of-the-money Call.
- Buy 500 shares of WETF @ $13.10 = $6,550 + Commission ($12.95) = $6,562.95
- Write 5 WETF March 2014 $15 Call @ $450 - Commission ($8.70) = $441.30
Note: Prices may vary from the time of post. Actual commissions paid will vary returns.
Static Return (Not Called):
(Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration
(0.88)/13.13 X (365)/229
= 10.68% Static Return
(Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration
(0.88 + 15 - 13.13)/13.13 X (365)/229
= 33.38% If-Called Return
Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.
Disclosure: I am long WETF.
Additional disclosure: We are long WisdomTree and have calls written on some of the positions. As active managers we may continue to buy for our clients.