U.S. Global Investors, Inc. (NASDAQ:GROW) Q2 2024 Earnings Call Transcript

U.S. Global Investors, Inc. (NASDAQ:GROW) Q2 2024 Earnings Call Transcript February 9, 2024

U.S. Global Investors, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Holly Schoenfeldt: [Call Starts Abruptly] During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don’t pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-Q filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today, and U.S. Global accepts no obligation to update them in the future. Moving on to next slide. As always, we would love to offer anyone tuned in today, one of our JETS, GOAU, SEA JETS all you need to do is send us an e-mail with your physical mailing address to info@usfunds.com.

Now on to the next slide, I will briefly review our company. U.S. Global Investors is an innovative investment manager with vast experience in global markets and specialized sectors. It was originally founded as an investment club, becoming a registered investment advisor in 1968. The company has a longstanding history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. We’re also well-known for our expertise in gold and precious metals, natural resources, airlines and luxury goods. Now when we move to the next slide, Slide number 6, this is where I want to hand the presentation over to CEO, Frank Holmes. Frank?

Frank Holmes: Thank you, Holly, and thank you all the shareholders who are listening. This is one of the most important disclaimers I always like because it’s colorful, but it’s factual in a quant world is the DNA of volatility. What’s important here is that, every asset class has its own DNA of volatility and it changes over time. They know well today that, the DNA of the human body can change and external forces, imbalances between macro forces of monetary fiscal policies can all of a sudden impact capital markets and it can change the DNA of the volatility of an asset class. Let’s take a look at the S&P 500. It basically says, it’s a non-event to go up or down 1% almost 70% of the time. Over 10 days is 3%. Yu can see that gold bullion is the same as the S&P 500.

If we go back 10 years ago, bullion was more volatile 2:1 to what the S&P was. On the Dow Jones US Asset Manager Index, it’s got a day daily volatility close to the S&P, but over 10 days, it doubles, basically, the 5%. GROW definitely doubles over 10 days. It’s a non-event, they go up or down 6% on a weekly basis. Some of our funds are known especially for gold and GOAU. You can see that it’s plus or minus 7% over a 10 day period. Those changes in the assets of the airlines or gold, they do have an impact in our funds and this is how we earn fees. We earn fees on basis points on the total assets that we manage and they can change over a monthly basis, a quarterly basis and that’s what changes basically. It’s very simple business to calculate what our revenue is going to be.

Next. Well the ETF world continues to beat down on the mutual fund world. As you can see, the ETF world continues to enjoy more product access and the fund flow is going out of the mutual fund world. It’s interesting that, the younger investors, the millennials and generations x, y, and z are much more keen to go and trade and invest, but predominantly trade an ETF to get exposure to a theme. Next, please. I want to thank our institutional shareholders, Vanguard, Royce Investment Partners, Parrot Capital, KWM and BlackRock. A couple of these other lineups are into index funds, and but still we thank them all for that we qualify and show up in their product lineup. Next, please. As I’m the CEO and Chief Investment Officer, and I’ve been in this saddle for about 35 years.

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Q&A Session

It’s interesting to watch how U.S. Global has been through different cycles of global booms and busts. But during this period, I’ve owned approximately 18% of the company and 99% of the voting control, that’s a technical part of having 40 act rules. But what’s important is I am the largest shareholder. Next. So bond yields are important to look at. And then we track what happens with the two year, five year, and the 10 year. And to share with you is that most the currency movement is off a two year yield, and that impacts gold. So that’s one reason why I follow the 50 day moving average on the yields. And the five year is predominantly on dividend paying stocks. And the 10 year is for the infrastructure spending. If you’re going to build a new pipeline, the financing is usually off a 10 year government bond, a new gold mine, an expansion of a gold mine.

It’s off a 10 year government bond. So it’s important to be able to track what is happening over 10 weeks, which is 10 weeks of trading, which is a 50 day moving average to get a feel for these swings and these short-term trades. And what you see here is the five year yield, when it crosses above the 50 day that is usually bearish. And you can see last year when the five year yield went above in May, that we started seeing small cap stocks fall micro-cap even more so, and we would be categorized, in fact, more of a micro-cap until October than when rates seemed to have peaked and the yield started declining. And as that was taking place, small cap stocks start at that rally. So this is trying to highlight that there’s a very strong inverse relationship with the five year yield and the dividends that you’re paying on your stock.

Next please, is to try to — this sets into the motion here that shows you that the Russell 2000 looked like it had a breakout, while rates were falling until this year, that all of a sudden the fear of rates rising, that the small cap stocks are selling off. So it’s sort of an important part, and I think that we’re pretty close to this cycle where rates are in a presidential election cycle in the fourth year, going back almost a 100 years of data in the fourth year of a presidential election cycle. When you have a Democratic President and a Republican Congress, the market is usually up 8%. But when you have falling interest rates and not rising interest rates going into this fourth year, odds are that it’s 11%, 12%. So even with all the negative news, the math suggests that the markets will be up this year.

This time last year, I forecasted that based on the presidential election cycle, the markets would be up historically double-digit in the third year. When you have this sort of balance of power, and it was, and now it was volatile, but it ended up closing up on the year. So I do like looking at data and I do from a macro point of view and a micro point of view from stock picking to macro, and that is called quantum mental approach to investing. And that has led us down the journey to create Smart Beta 2.0 ETFs. And so it doesn’t matter if it’s a macro factor or it’s a micro, we do look at these factors and I thought I’d highlight that when rates do start to tick down be they in April or May, that I think that we will see money flows into this category, which does impact companies like US Global.

Next, please. Our capital strategy, the allocation strategy, well, one is the shareholder yield, and the shareholder yield is a model that looks like the cash dividend paid plus the net share repurchases and net reduction divided by the market cap. That’s another way of looking at it. And there’s a fund manager, Meb Faber, that wrote a book on it, and he’s picked stocks and they seem to as a deep value approach of picking the stocks and they both performed. So we do follow that and we do ask questions on a regular basis of where we’re allocating capital. Two is, we manage expectations for new product launches, what’s necessary? How do we brand this asset class? And three, we manage to preserve cash for future growth opportunities and market corrections.

We have been stockpiling cash, we have been buying back our stock, and fourth is, strategically buyback the stock, but using an algorithm on flattened down days. And five, we discussed and review with the board on a regular basis and keep in touch with their boards so they know what we’re doing and why? Next. So this is my being favor, and he came up with this famous book and really pound with the table across America on the shareholder yield, a better approach to yield investing. And it’s a bit of looking at Warren Buffett’s model of looking at companies that if they’re not paying dividends but they’re decreasing their yield and they’re increasing their cash flow, they’re to be bought if they’re buying back stock, Warren Buffet’s always believed that it’s been a better than paying out dividends.

But he has this unique model which we look at and respect. Next, please. This is the model, shareholder yield is three parts share cash dividends plus net purchase of your shares back, and net debt reduction divided by the market cap. Next, please. So, gross’s dividends, the company has paid monthly dividends since June, 2007, and it’s interesting because that was the peak in gold and all the emerging markets really peaked and we started that strategy of paying out dividends. But we’ve been able to do through down cycles and 2008 crisis, still be able to maintain paying dividends of how we manage our capital. But the yield right now is 3.17%. I’m going to show you that it’s below the five year, but that’s okay because the buying back stock just takes the yield higher.

The Board approves this, but they can anytime, they can always cut a dividend, they have that right. If something comes up. Next, please. Total shareholder yield is approximately 7.9%. Next, please. That is adding back the dollars we’ve spent buying back the stock plus paying out dividends. So you can see here that the grow dividend is below the five-year treasury yield. Now, why do I show that? Is because lots of institutions make a decision that they will rather buy risk free a five year government bond than buy a stock with a dividend yield that’s less than five year yield, unless that dividend is increasing, faster. Therefore, it will catch up and surpass the five year treasury yield over the next five years. It’s my first time as a money manager, Research Analyst actually, was in 1978.

I’m aging myself, but it was on a dividend growth monitor and you looked at stocks that had yields that were higher than the five year government and it’s interesting that they did outperformed. You have to look at that model in the context of how much is being spent on buying back the stock along with a dividend yield. Next, please. You saw earlier that our total shareholder yield is twice what our dividend yield is more than twice and it’s higher than the five year government bond. It is of great value and is and so another rational reason for buying the stock, on down days. This is an important comparative analysis. We quite often get calls from institutions and comparing us to WisdomTree and to Invesco. The reason why I bring these two names up is, WisdomTree is a 100% ETFs, 85% of our operating revenue is ETFs. And Invesco is 40% because they have the biggest piece of them, the QQQ ETF.

What you can see is that, the price to book value for WisdomTree is substantially higher, almost 4x higher or 3x higher than what ours is. And so, it says that on, a price to book relative valuation were undervalued relative to WisdomTree. Invesco looks a lot cheaper, but then there’s other factors in that financial model. It’s number one, singular factor. The return on assets as you can see, the return on assets by WisdomTree was greater, than ours, but we’re greater, both of us, than Invesco. That’s one reason why Invesco trades a lower price to book. And then pretax margins, for WisdomTree, they’re higher. That would afford a higher P/E ratio. We are much higher than, say, Invesco. And then we look at dividend yield and compare. As you can see that, the lowest dividend yield is WisdomTree, then we’re in the middle between Invesco and our price to cash flow is about the same of WisdomTree, is higher than Invesco, but it appears that Invesco has other losses that they’re wrestling with.

And then this is sort of the gambit. These companies are bigger, we’d be a microcap, WisdomTree a midcap and Invesco be a bigcap, or probably a midcap going into a bigcap range. I think it’s just a helpful comparative analysis and some basic fundamental approach that analysts would take a look at picking one stock versus another. Next, please. Why we buy back our shares? One of our large institutional investors, I have a tremendous respect for. Bruce is always wants to know articulating it, and I want to point out that, the company believes that stock is undervalued and therefore buys back shares of growth stock when the price is flattered down from the previous trading day. As Warren Buffett highlights the value proposition of buying back one stock at value-accretive prices, doing so, Buffett says, benefits all shareholders, not just the biggest holders and we agree.

Next, please. The current shareholder repurchase program for the quarter ended December 31, 2023, the company repurchased a total of a 196,295 shares, Class A shares using cash flow approximately $560,000. We bought back about 1% of the outstanding shares since September, 2023. And this may be suspended, discontinue as deemed necessary by the Board. I think what’s important is that you can only buyback a certain amount of the volume. So if the volume picks up, then we can pick up more. There’s always sort of regulatory borders in sports, they call them in hockey blue line or red line. So you have to sort of manage within the boundaries. I’ve been asked, well, why don’t you buy back more, because it’s relative to this model, what the volume is.