Description

Disclaimer: GROW is a micro-cap stock and has limited liquidity.  Best suited for personal accounts or very small funds. The stock was written up on VIC in June 2020 at $2.36 and June 2021 at $5.74. I am writing it up now because I think it is a safer buy today than it was at either of those times, though the June 2020 write-up was exceptionally well timed. 

INTRODUCTION

U.S. Global Investors (GROW) is a niche asset manager based in San Antonio, TX.  The company has been around for a long time (since 1968, to be precise) and has historically been known for its gold and precious metals mutual funds. More recently, it is known for JETS, the company’s wildly successful airline ETF that was launched back in April 2015, and which improbably became a huge favorite of the Robinhood / Reddit trading crowd in the wake of the global pandemic in the spring of 2020. 

Starting at less than $50M in AUM in early 2020, JETS hit $1B in AUM by June 1, 2020, swelled to $2B by November, and continued to ramp from there. Assets broke the $3B level in February 2021 and hit $4B by March of 2021 on its way to an all-time high of just over $4.5B in mid-June 2021. Since hitting that peak in assets, the AUM level bounced around between $3B and $4B for the rest of 2021 before falling below $3B in May of 2022 as the overall market began to falter. By late September, JETS saw its AUM dip just below the $2B mark before a little recovery into year-end.  Most recently JETS had AUM of ~$2.2B as of January 13, 2023.

Due to the success of JETS, GROW went from a business on the edge of oblivion with only ~$3.5M in total revenue and slightly negative cash flow in the fiscal year ending in June 2019, to a business that produced over $20M in revenue and saw cash flow jump to $4.7M in FY2021 and then to nearly $25M in revenue and over $10M in FCF for the FY’22 ending in June 2022.  GROW’s stock price reacted as one might expect to this stunningly good change of fortune, rising from less than $1 in early 2020, hitting $7 by early 2021, and then spiking to nearly $12 in April of 2021.

Since then, GROW’s stock has mostly followed the AUM trend of JETS, and by May of 2022 was trading back below $5.  In July 2022, GROW received a buyout offer of $5.30 per share, which was at that time a roughly 20% premium to the pre-offer stock price. But the cash portion of the offer was only $2.65 per share, and the deal was also contingent on GROW liquidating its own investments to help fund the acquisition.  In a press release, GROW CEO Frank Holmes dismissed the offer as insufficient, and the company increased its share buyback authorization in response. As the AUM levels for JETS dropped briefly below $2B in late September 2022, GROW’s stock continued to slide, falling to $3, and has been bouncing between the high $2’s and low $3 level since. That GROW’s stock price would largely mirror the asset flows of the JETS AUM isn’t that surprising, given that JETS comprises something like 80% of GROW’s total AUM and a similar percentage of the company’s revenue. 

At a price of ~$3 per share and with roughly 14.9M shares outstanding, GROW has a market cap of ~$45M.  Normally, an investor might look at the market cap and compare it to the most recent twelve months revenue ($22.6M through Sept 2022) and FCF ($9.1M), ponder the low multiples (2X sales, roughly 5X FCF), and then try to determine whether GROW’s future business prospects are likely to justify these low multiples. 

But at the current valuation with the stock around $3, struggling with the question of how to value the sustainability of JETS or the prospects for the rest of GROW’s business isn’t totally necessary to make the argument that GROW’s stock is cheap.  That’s because GROW’s balance sheet is stuffed with cash and various investments on the asset side, against minimal liabilities.  Assuming we trust the values provided for GROW’s assets, the stock at $3 would almost qualify as a classic Ben Graham net-net working capital stock trading at a discount to the solid assets on the balance sheet. Below is a condensed summary of GROW’s balance sheet as of 9/30/22:

ASSETS                                                    ($M) 

Cash                                                     $   23.3

Restricted Cash                                    $    1.0

Investments securities                         $   12.0

Non-current equity securities             $     4.4

Debt securities at fair value                $   10.7

Other investments                              $     2.6 

TOTAL                                                   $   54.0

Total liabilities                                       -$   3.7

NAV                                                      $  50.3M

Shares                                                    14.92M

NAV/share                                                $3.37 

How solid is the asset side of the balance sheet? The cash of $23.3M is self-explanatory and needs no adjustment. The $1.0M restricted cash is collateral for GROW’s unused credit facility and is sitting in a money market account. The $12M listed as investment securities are considered current assets and are invested in GROW’s own fixed income mutual funds, which are short-duration, low-risk bond funds. Added to the cash above, this comes to $36.3M in low-risk investments, or $2.43 per GROW share. GROW also has $1.6M invested in its own global equity mutual funds, as well as $1.1M in “international equities”, which appears to be an internally managed portfolio of non-US publicly traded stocks separate from GROW’s mutual funds. These are included in the non-current equity securities bucket.  While the $2.7M value of these assets will fluctuate, I am not worried that they will lose a massive percentage of value overnight, and they may well be decent investments. So that’s $39M in solid asset value, or roughly $2.61 per share.

At this point we run into some assets that are much harder to have confidence in: convertible debentures and warrants in a publicly traded digital asset mining company called HIVE Blockchain (HIVE), marked at a combined fair value of $13.4M as of 9/30/22.

 HIVE is a digital asset mining company headquartered in Canada with publicly listed stock both in Canada and on the NASDAQ in the U.S.  The company’s crypto mining facilities are in Canada, Iceland and Sweden, and have historically been mostly devoted to Ethereum mining, but HIVE has also mined other crypto assets including Bitcoin, Monero, and ZCash. HIVE currently has a market cap of over $250M, and it does appear to be a real business (if you take the position that mining crypto-assets and selling them on the open market is real). There is quite a bit of history between GROW and HIVE, as GROW originally purchased 10 million shares of HIVE back in late 2017 for about $2.4M, and one of GROW’s managed funds also purchased 7 million shares at the same time. As part of that investment, GROW CEO Frank Holmes was appointed as non-executive chairman of HIVE’s board. On August 31, 2018, Holmes became interim CEO of HIVE, and it was only this past week (Jan 20, 2023) that HIVE named a permanent CEO (Aydin Kilic) and Holmes returned to his position as HIVE chairman.

As unorthodox as the HIVE investment may have been back in 2017, it certainly paid out big for Holmes and GROW. In December 2020, GROW announced that it had sold its 10 million shares of HIVE for over $20M, locking in gains of over $18M on the investment. The same press release stated that GROW planned to reinvest $15M of the proceeds back into HIVE via the private placement of convertible debentures. In the press release, Holmes explained the repositioning of GROW’s investment in HIVE in debt versus equity would reduce volatility and move GROW higher up the capital structure. This was partly motivated by the changes in GAAP accounting that required GROW to report the unrealized gains and losses on its HIVE investment each quarter on the income statement, which was causing GROW to report massive swings in profit from quarter to quarter. But it seems that GROW CEO Frank Holmes is a true believer in crypto and wanted GROW to have meaningful exposure to the asset class via its investment in HIVE.

The debentures mature in January 2024, pay principal and interest quarterly at 8%, and are convertible by GROW at any time into common shares at a conversion price of $11.70 US per share.  As of September 30, 2022, the remaining principal amount was $9.8M. In addition, GROW received 5 million warrants, carrying a three-year term and converting at $15 CAD per share (note: the conversion prices reflect the impact of a 1-5 reverse split). GROW originally recorded the fair value of the debentures at $16M and valued the warrants at $5.9M. The warrants had been written down to an estimated fair value of $2.6M as of September 30, 2022.  I assign zero value to the warrants. However, I think there is a good chance that the remaining $9.8M in debt principal will be fully repaid between now and next year.  Assuming the $9.8M is money good, GROW’s cash and investments would be $48.8M, or $3.27 per share. If one were to discount the debt by 50% to $4.9M, this would reduce GROW’s cash and investments per share to $43.9M, or $2.94 per share.

If we then deduct the full $3.7M value of all liabilities and ignore any other assets at GROW, the NAV would be $3.02 assuming the full value of the converts, and $2.90 per GROW share using the 50% haircut. With the stock at $3, either approach implies a valuation of GROW’s $2.9B money management business at virtually zero. Just for completeness, GROW also has a VC investment in the form of a 2.8% ownership stake in a company called The Sonar Company, with a cost basis of $150K that was valued at ~$360K as of September 2022. I assign no value to this stake, though it might turn out to be worth something. 

The Asset Management Business

While we aren’t paying much for it, let’s take a quick look at GROW’s asset management business and then I will take some guesses as to what it might be worth.  As mentioned earlier, CEO Frank Holmes was clearly cognizant of the structural trends pressuring the company’s traditional mutual fund business, leading the company to launch the JETS ETF back in 2015.  The company has since added three additional ETFs, those being the somewhat awkwardly named U.S. Global GO GOLD and Precious Metals Miners ETF (ticker GOAU) launched in June 2017, and the newly launched U.S. Global Sea to Sky Cargo ETF (ticker SEA) which concentrates on global shipping and air freight stocks. The fourth ETF is simply a UCITS-compliant version of JETS listed in Europe, also ticker JETS. For the ETFs, GROW charges a flat fee of 0.60% annually, but also agrees to bear all expenses of the ETFs, which grow with the number of clients and AUM but does scale nicely at size. Given how volatile the underlying JETS ETF is, GROW’s quarter to quarter financial results are much lumpier than would be the case if the AUM base was more diversified. 

GROW’s legacy mutual fund business is also still there, and though I expect that the funds will slowly decline in AUM over time, they likely will have a very long tail.  In its financial materials, GROW refers to its mutual fund complex as USGIF, and this group consists of three gold and natural resource funds, two very small international funds, and a global luxury goods fund (which was previously a macro strategy run by Frank Holmes).  Those are all equity funds. There are also two different short term bond funds, but in recent years interest rates have been so low that GROW has been waiving its management fee, so these probably do not contribute at all to GROW’s business, though it seems that GROW utilizes them to invest its own corporate cash.

One of the minor differentiators of GROW’s mutual funds is that they feature a performance-based fee component (called a fulcrum fee) that can be positive or negative. Essentially the management fee is adjusted by 25 basis points (either positive or negative) if there is a performance difference of greater than 5% between GROW’s funds and their respective benchmarks over the prior rolling 12-month period.  This fulcrum fee can cause some additional lumpiness in quarterly and year over year revenue trends. Management fees for the mutual funds range from 0.375% to 1.25% annually, apart from the fulcrum fees. GROW also internally administers its mutual funds and collects a small fee per account for its troubles.

After hitting all-time highs in AUM back in late 2021, the combination of the poor stock market returns of 2022 (and perhaps the waning of stock market trading as many retail traders went back to normal life after the pandemic lockdowns) meant that GROW suffered AUM declines largely across the board in its managed funds. AUM in the JETS ETF was down to ~$2.5B as of the fiscal 2022 year-end date of June 30, 2022, a decline from $3.6B in June 2021. JETS represented 82% of GROW’s total revenue and 86% of total AUM for FY22.

In Q1 FY23 ending September 30, 2022, GROW’s AUM declined further. GROW ended the period with total AUM of $2.3B, a YOY decline of 46%, while the average AUM in the quarter was $2.9B, down almost $1B from the prior year quarter. Total ETF AUM as of September 30, 2022, were roughly $1.98B, while the AUM for GROW’s mutual fund business was down to $326M as of September 30, 2022, a YOY decline from $474.4M.

The good news is that it appears that AUM has started to improve here in early 2023, as investor sentiment has improved for airlines after a tough end to calendar 2022.  JETS is off to a good start on the return front, with the ETF having returned ~17% so far in the first three weeks of the year.  GROW’s precious metals funds are also off to a decent start in 2023, and I estimate that total AUM for GROW was back to over $2.6B as of January 20th, with JETS at ~$2.17B.

The table below shows GROW’s estimated AUM as of January 20, 2023, and was estimated by going to each of the fund’s AUM page from the ycharts.com website:

JETS Total Assets Under Management (ycharts.com)

AUM BY FUND                                   January 20, 2023

JETS                     $2,170.0M

GOAU                         91.5M

SEA                             4.3M                                       

ETFS                    $2,265.8M    excludes UCITS JETS

USERX                      119.4M

UNWPX                       61.4M

PSPFX                         59.0M

USLUX                        44.6M

UGSDX                       32.2M

NEARX                        30.6M

EUROX                       15.5M

USCOX                        6.9M                                       

USGIF total              369.6M

TOTAL AUM           $2,635.6M

Profits, Cash Flow, and Breakeven AUM

GROW enjoyed very strong years of operating performance from its asset management business in FY21 and FY22.  The sudden success of JETS in the back half of calendar 2020 led to a huge jump in revenue for GROW in FY21 to $21.65M, of which $16.47M came from JETS management fees. With operating costs of $13.5M, GROW reported operating income of $8.165M in FY21, while free cash flow lagged operating income but was still a respectable $4.76M. In FY22, GROW’s total revenue jumped to $24.7M, with over $20.4M in ETF fees from JETS. Operating expenses were roughly flat at $13.6M, such that GROW produced operating income of over $11.1M, and FCF was $10.3M.

GROW’s reported GAAP net income in FY’22 included a loss of $4M due to declines in fair value of the company’s own corporate investments, which included a $2.5M write-down on the HIVE warrants and unrealized losses on equity investments of $7.2M, offset by realized gains of $1.8M.

In FY’21, however, the company benefited from $29.3M in investment income, which included unrealized gains of $9.9M on equity investments, and realized gains of $16.6M, of which $15M was from the company’s equity investment in HIVE.  GROW also recorded a one-time gain of $444K from the forgiveness of a PPP loan the company received for pandemic relief.  GROW recorded a $1.6M tax expense in FY’22 and recorded $5.5M in tax expense in FY’21.

GROW’s revenue will likely fall in FY’23 relative to FY’22 with the decline in average AUM for JETS and its other funds. GROW’s total revenue in Q1’23 (the September quarter) fell to $4.4M from $6.5M in Q1’22. GROW was able to reduce expenses (primarily employee compensation) down to $2.83M from $3.65M YOY, and as a result was still able to produce quarterly operating income of $1.585M (versus $2.867M) and an operating margin of ~36%. Operating cash flow was cut in half to $1.175M from $2.402M but was still decently positive. Capex was negligible in Q1’23 and GROW returned about $500K to shareholders through dividends and share buybacks during the September quarter.  

My best guess is that GROW can operate at cash flow breakeven at somewhere between $1.3B and $1.6B in AUM given its current expense structure and could maintain profitability at even lower asset levels with some austerity measures. At the current AUM levels of ~$2.3B+, I’d expect GROW to report revenue of $4-5M per quarter, or maybe $16-20M annually.  Operating income should be roughly $1-1.3M per quarter (or $4-5M annually) and the company should be able to produce cash flow at similar levels ($4-6M). 

The company has historically been pretty good about keeping its cost structure in line with its revenue, and in the 10-K the company notes that it “maintains a flexible structure for compensation expense by setting relatively low base salaries with bonuses tied to fund and company performance. Thus, the company’s expense model somewhat expands and contracts with asset swings and performance.”  As of June 30, 2022, GROW had 20 full time employees and 2 part-time employees.

CEO Frank Holmes is paid a base salary of ~$420K, and usually receives total cash compensation of over $500K depending on business performance. CFO Lisa Callicote is paid around $165K in base salary and usually receives about $250K in total cash compensation. Each of these two also receive equity-based compensation. While Holmes is paid highly relative to GROW’s small size, he has in years past willingly reduced his salary and waived bonuses in the lean years, and he also passes his executive compensation from his role at HIVE through to GROW. There is stock option compensation at GROW, but it is not excessive. As of September 30, 2022, there were 229,000 options exercisable, but the weighted average strike price was $6.05 per share.

This is probably a good time to talk about GROW’s share structure. There are about 13.06M shares of Class A non-voting stock which is what is publicly traded.  In addition, there are about 2.068M shares of Class C voting stock, over 99% of which is owned by Holmes, which gives him sole control of all issues requiring a stockholder vote. There are no B shares outstanding, and minus shares previously bought back and held in treasury there was a total of about 14.92 million shares out as of September 30, 2022. For good or bad, GROW is controlled by Frank Holmes, and he makes all the major decisions.

While I’m sure there are mixed opinions on him, in my view Holmes has been a decent control shareholder in terms of treating minority shareholders. Under Holmes, GROW has been a consistent dividend payer when it could afford to be, and it has also engaged in share buybacks that appear to be at intelligent prices, though buybacks are somewhat limited by the stock’s low volume. It is not easy to know what “intelligent” prices are to buy back stock given how volatile GROW’s business has been, but generally Holmes has bought back stock when prices seemed reasonable relative to the business prospects, and when the company was well enough capitalized to do so without worrying that it will need the cash. As of January 2023, the dividend is set to be paid monthly at $0.0075 per share, which comes to 9 cents per year. At the current ~$3 stock price, that is a 3% dividend yield.

In late 2022, the board increased the share buyback authorization to an annual amount of up to $5M.  In Q1 ’23 GROW bought back $133K worth of stock, buying 39,965 shares at an average price of around $3.32.  GROW bought back $452K worth of stock in FY22 and $314K in FY21.

Corporate Investments

Despite living in Texas, Holmes is originally from Canada and as an investor seems to be an eclectic mix of gold bug, crypto enthusiast, venture capitalist, and global macro trader.  He considers corporate investments to be an important part of GROW’s business, and this makes GROW a bit unpredictable and adds some risk. But there is also some potential that he will do something smart or lucky, such as the first HIVE investment that turned $2.5M into $20M (at least for now). 

For the most part, GROW has invested its corporate cash into its own fund products, with an emphasis on the short-term debt funds but also in some of its equity products. This of course seems like a reasonable thing to do with money GROW doesn’t have an immediate need for. Holmes also manages a ~$1M portfolio of listed international equities.

Since HIVE is the company’s largest corporate investment by far at roughly 25% of total company NAV – though it was only $2.5M originally – it is worth understanding what Holmes was thinking when he made the investment.  An author on Seeking Alpha writing about GROW was able to get Holmes to answer some questions directly, and here is what he stated in that article:

U.S. Global Investors made the original investment in HIVE Blockchain because we recognized early on the SEC’s resistance to allow a Bitcoin ETF due to various regulatory concerns. However, we learned quickly that mining operations for cryptocurrencies, such as Bitcoin, did not have these regulatory risks. Noting the SEC’s resistance to allow for a cryptocurrency ETF, we decided the best way to offer GROW shareholders exposure to this industry was to invest in a cryptocurrency mining company – HIVE Blockchain Technologies. We wanted to create a win for GROW shareholders.

If you are Frank Holmes, this investment probably makes a lot of sense. As the CEO of an asset management company looking to source unique offerings to investors, you want to find differentiated things for them to invest in – JETS, for example.  Holmes probably would have preferred to open a bitcoin or Ethereum ETF to offer retail investors. But given the regulatory difficulties (and likely a lot of competition from other players in the crypto space launching similar vehicles) he did the next best thing, which was to convert GROW itself into a way to play the crypto theme and bring more retail investor attention to GROW’s stock in the process. 

It wasn’t a crazy thing to do, and the modest size of the initial investment meant that it wasn’t likely to be disastrous if it didn’t work out.  Now that HIVE has become a much bigger investment for GROW it becomes a little more important that it work out.  There is some possibility of reputational risk if sentiment turns even more negatively against the crypto world, and there is the risk of Holmes having his time and attention diverted to HIVE rather than GROW.  But I think the most likely scenario is that GROW gets its debt repaid and is left with some warrants that may or may not be worth anything. If this turns out to be the case, it will require a write-down of about $2.6M from the 9/30/22 fair value estimate.

Holmes has made several other corporate investments over the years, and GROW has seemed to come out OK on most of them.  Back in 2014, GROW bought a roughly 2.5% stake in Canadian animated content producer Thunderbird Entertainment (TBRD).  That company eventually went public and appears to have become a reasonably successful company – it is now publicly traded in Canada, Europe, and on the OTC market in the US. Holmes served on the board of the company from June 2014 until March of 2021. In FY22, GROW sold its shares and realized a $1.8M gain.

Several years ago, GROW bought a majority 65% ownership stake in a Canadian investment manager called Galileo, which was also heavily into crypto/blockchain investments. GROW also invested in one of Galileo’s limited partnerships. In March 2020, GROW sold its ownership back to Galileo for $1M CAD, and in the summer of 2022, GROW received proceeds from the liquidation of the LP investment of $85K and received a pro-rata distribution of an investment held in the fund that had a fair value of $228K at the time it was received by GROW. It appears that GROW has no further investment in or affiliation with Galileo following the LP distribution. This one doesn’t appear to have worked out as originally planned, but GROW didn’t seem to suffer any material loss from the deal.

Other than HIVE, the only other active VC or strategic investment that I am aware of at GROW is the previously mentioned VC stake in The Sonar Company, valued at $362K. Roy D. Terracina, one of the directors at GROW, is also the CEO of Sonar since July 2021.   

GROW: Discount to Net Asset Value Plus a Long Call Option

As discussed earlier, at the stock price of $3, GROW sells for a market cap of about $45M versus the simple NAV of about $50M, which includes all liabilities.  However, the actual NAV is higher than that because the asset value in the NAV calculation above didn’t include the management fee receivable accrued as of 9/30, which was roughly $1.4M. There is another hidden asset at GROW in the form of its owned office building in San Antonio, which is 46,000 square feet and sits on about 2.5 acres of land.  GROW does sublease some of the office and receives about $100K per year in net lease income. The value of this building is shown as ~$1M on GROW’s balance sheet but is probably worth north of $5M. I consider this an additional layer of margin of safety to the NAV calculation.

Even if the HIVE investment suffers an impairment, there is plenty of asset value to protect an investor’s downside at $3. The way I think about GROW at this price is that it is essentially a free call option on the future growth or extended longevity of the JETS ETF as an economic franchise, with the potential that Holmes / GROW hits it big with another differentiated ETF, or that something else good happens 

It seems self-evident that in its current form at least 80% of the business value at GROW comes from the JETS ETF business. While there are a lot of ETFs out there and there is a justifiable perception that they are something of a commodity, I do think it’s possible for an ETF to be a franchise business if it is the first mover in a niche. JETS is currently the easiest and most liquid way to play a diversified basket of airlines (as well as a few other related commercial aerospace securities) has made it the clear beacon for investors wishing to place a bet one way or the other.  Now that JETS is out there and has attracted such a wide following, including the ability to play it with a liquid options market, it has a chance to benefit longer term.  It seems clear that once a niche-specific ETF becomes the de facto passive investment vehicle for that sector, it usually maintains that status for a while.  

While the barriers to entry for new ETFs by established players is relatively low, the business attraction of launching a similar ETF to JETS would appear to be minimal. Any new entrant will likely have to offer a meaningful fee reduction to attract investors, which automatically limits the expected economic value. If JETS has $2B in AUM and a competitor ETF is able to attract 25% market share by offering the same product at 40 bps instead of 60 bps, that competitor can only hope to make $2M per year in gross revenue. The costs will be the same, such that if GROW is able to make 80% operating margins at $2B/year, JETS 2.0 probably only makes 50% operating margins. It doesn’t seem like the potential rewards are worth the risk and upfront costs for a rival ETF provider to bother with it. That’s not to say definitively that someone won’t do it – a competitor could well materialize – but I assess the chances of long-term success for a second player would be quite low.

A much more likely risk for GROW is that at some point investor interest in JETS will cool off, or perhaps more accurately, continue to cool off.  The AUM has already dropped from $4B to $2B, and it could easily go back to $1B. One of the mystifying elements of the whole JETS phenomenon is that as the COVID crisis hit and airline stocks got clobbered, online brokerage platforms and particularly Robin Hood gained a huge number of first-time investor accounts.  While some of these may be bona-fide investors, it seems that with massive COVID-induced unemployment in many sectors, stay at home orders, the absence of live sport events and in-person casinos for betting, it seems that a meaningful percentage of these new retail traders are what GROW CEO Frank Holmes described as “bored millennials” looking to day trade to make money or for entertainment. It may well be that the shrinking AUM at JETS doesn’t only reflect the tough stock market conditions of 2022, but also the decline in activity from pandemic-era retail traders as they go back to doing whatever they did before the lockdowns and stimulus money turned them into stock traders. All that said, I think that today JETS is primarily a speculative tool for professional investors and traders, and that while retail investors may have fueled the initial popularity of the ETF, the big money has always been on the institutional side. In any case, GROW only needs for JETS to maintain AUM in the $1.3B to $1.5B range to make enough money to achieve cash flow break-even, and possibly less if GROW focused intently on reducing costs. I think there is a good chance JETS is able to achieve this, at least on average over time. Given its narrow theme, JETS will continue to be volatile, which means that the AUM figure will also bounce around a lot, but the volatility also means that it will likely attract traders willing to speculate on the next big move.

As far as other call options for GROW, the new SEA ETF may eventually achieve enough scale to become profitable, and there is always the chance that GROW will come up with another successful investment offering in the future. The company might also benefit from renewed investor interest in gold and precious metals stocks, which is GROW’s traditional forte – though it is a space where GROW is decidedly not an industry leader. 

If you think that on average GROW can produce revenue of $15-20M and cash flow of $4-5M per year, even at a very low multiple on that cash flow (say, 6-7X) GROW’s asset management business would be worth something like $30M. Finally, it isn’t crazy to think that GROW might be an acquisition candidate for a larger player in the industry. Of course, Frank Holmes would have to be willing to sell, but there is no doubt that the JETS ETF would be a nice addition to a larger ETF provider – I can’t see how it isn’t worth at least $25-30M to a strategic acquirer. Adding the net asset value of ~$3.20 per share to the low-end business value of $30M implies that GROW should be worth at least the mid-$5 per share range.

With a negative EV, GROW doesn’t need another huge hit for the stock to be a big winner from $3 – it just needs to run a profitable, viable business for as long as it can and do smart things with the free cash flow the business generates.

I’ve already noted that GROW is a micro-cap company and isn’t very liquid, so it really isn’t a usable idea for anything other than very small funds and personal accounts. But since I view GROW as more of a cheap call option as opposed to a long-term equity investment in a durable business, I think it makes sense to size it like a call option at something like 75-100 bps of a portfolio. Given the low valuation and low price, the stock could easily double on good news. A 1% position that doubles provides the same portfolio impact as a 5% position that goes up 20%, so it’s an idea that might have utility for small portfolios. 

As a final comment, I will confess that GROW isn’t my normal cup of tea and not my preferred idea type. I prefer businesses that I can value with more confidence, make larger positions, and average down with conviction if the stock price goes against me. But I have also come to the view that these kinds of ideas can be big winners in the right conditions, and having even a small position in a portfolio can go a long way when they hit. The downside in this case seems well protected here at the current valuation, so I consider GROW to be a relatively attractive asymmetric bet that is worth devoting a small portfolio allocation to.

Catalyst

• JETS AUM grows back to the $3-4B range and GROW is able to generate $8-10M per year in free cash flow.
• The new Cargo ETF (SEA) reaches some minimum threshold for viability.
• GROW becomes a take-out candidate for a larger asset manager.
• GROW's precious metals funds recover some momentum.