Three months ago, I bought shares of US Global Investors (GROW: Nasdaq). At the time, the shares were trading for little more than adjusted book value and about twelve times run rate earnings. If you striped out the adjusted book, the shares traded for a low single digit multiple on earnings. Clearly this was a cheap valuation. Furthermore, the company pays a two cent monthly dividend. At my purchase price, that worked out to nearly a 5% yield. Even better, the company manages mutual funds tied to both commodities and emerging markets, two sectors that I am currently quite bullish on. Were the assets under management (AUM) to increase, you would have an example of Gearing. With both sectors doing well, I hypothesized that an increase in AUM was probable while I was more than compensated for the risks if that did not happen. It was a perfect win-win scenario. Either, AUM stayed constant, and I’d get my dividend plus some modest appreciation, or the AUM increased dramatically and there could be huge upside. Situations like this are quite rare. Only mindless index funds selling shares could create such a bargain.
In the past three months, the AUM has increased, but the increase has been modest. There has been some appreciation in their larger funds, but they’ve had no net inflows. This isn’t too surprising. The Market Vectors Gold Miner ETF (GDX: NYSE) has seen outflows for months now. I think it’s too early to judge my thesis of increases in AUM. Sectors get popular, and then they go ice cold amongst retail investors. It is the nature of the beast. Normally, I’d be patient and hold onto my shares. Unfortunately, they’re up 60% since I put the position on.
The thesis is in the indeterminate category, yet the shares are acting like I got it right. I always viewed this as more of a trade than an investment. As of the close of trading today, I will consider this position closed.
There is nothing wrong with the company. In fact, I really do like the management team and still have a bit of the position on. Based on the current AUM, I figure that fair value is roughly $8-$10 a share. We’re midway through that range and it never pays to be greedy. I had hoped that the fair value would outpace the increase in the share price, but that just hasn’t been the case. Forced selling from index funds gave me a gift and I took it. In such uncertain times, I prefer cash to waiting it out for the AUM increase that I still anticipate.
It’s been a fun ride.