Description

This writeup will be short and to the point.  GROW is an asset manager.  Their funds are "meh", and it is not run by a genius.  They did however step in it recently with their ETF JETS.  JETS started the year with about 50m in AUM and as airlines blew up, its AUM blew out.  

Microcap investors tend not to see things until they are put in their faces.  When GROW reported Q1, the ETF was a small contributor in an an earnings report which looked like a continuation of what GROW had experience the last decade or so: small operating losses and declining AUM.  

JETS went into March with $33m of AUM and ended it with 318m, at an average of 175m @ 60bps for a month, it was barely noticable. As of this morning it had 930m in AUM, it may eclipse 1b by end of day.  

People are gambling in airline stocks and GROW owns the casino.  In ETF land, size and volume tends to beget more size and volume.  As it becomes the trading vehicle, options markets spring up around it, hedge funds use it hedge.  As of today, there's no other casino for Robinhood investors to gamble in other than the individual airlines themselves.  

All this AUM is going to take a company that was losing some money every quarter and turn it profitable, how profitable depends on how big JETS can get.  A lot of sector ETFs that are trading vehicles can attract a couple billion dollars.  I don't know where JETS tops out, but I don't think its done yet.  

An incremental 900m of aum creates $5.4m that runs right through the P&L, if it gets to operating income.  There was a divestiture, but I think run rate costs are in the $4.5m range and prior to the JETS AUM explosion, revenues were in the $3.2m range, the markets bounced back some for the other funds too, so maybe its $3.5m ex-JETS.  So currently we're looking at going from losing 1m or so to earning about $4.5m pre-tax.  There's a $9m NOL that now looks like it could get used up sooner rather than later, so if we think JETS is going to GROW further, we need to tax the earnings.  Here's what I think that looks like the further this goes:

I think getting to $1.5b is very doable, possibly more.  There are plenty of sector funds which hold a surprising amount of AUM.   MLP funds that hold upwards of $3b, Materials $2b, Utilities have $10b, various aerospace/defense with upwards of 3b.  

At $2.35 or so, I have this about 8x run rate EPS, but the stock is even cheaper than it looks on a run rate basis because the company has cash, investments, etc. on the balance sheet of $14m as of last q, or $0.93/sh.  That's probably higher today, but I'm not going to try to figure it out exactly, as far as I'm concernedthe EV is about $20m, or $1.33/sh.  They also own their own building in San Antonio, which looks nice online but I have no idea what its worth and it probably doesn't matter b/c they aren't going to sell it. 

The company has a buyback in place, so maybe they can get some of the float down before people realize the windfall from JETS.  I think it is possible their other ETF picks up some traction, but nothing like JETS. 

Risks are obviously a competing product comes out and picks up traction, or investors stop trying to gamble on airline stocks, but I don't think they are likely to stop sometime soon.  You can track the AUM daily and probably take advantage of people not following it too closely.  Management aren't geniuses, putting out a 62 page powerpoint deck for earnings calls and taking shots at Buffett for selling his airlines is a case in point, but they get the basics of buybacks/dividends.  

As I mentioned in the intro, I think its important to note that microcaps tend not to reprice until people see the numbers.  There won't be numbers until September, as their FY ends 6/30 and as a small filer they have at least 75 days to report (maybe 90, I haven't checked).  The investments get marked to market so they also create some noise, though I think they will be tailwind for June at this point.    

Catalyst

More Robinhood Investors continue to pile in.  

They show revenues/earnings growth next report.