U.S. Global Investors Q2 2024 Earnings Call Transcript

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February 9, 2024

There are 3 speakers on the call.

Operator

As you can see on Slide number 2, the presenter for today's program are Frank Holmes, U. S. Global Investors CEO and Chief Investment Officer Lisa Calicott, Chief Financial Officer and myself. If we move on to slide number 3, 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.

Operator

Please refer to our press release and corresponding Form 10Q filing for more detail on factors that could cause actual results to differ materially from any described today 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 the next slide.

Operator

As Always, we would love to offer anyone tuned in today, one of our Jets, GO AU, or CHATS, send us an email with your physical mailing address to infousbunds.com. And now on to the next slide, I will briefly review our company. US 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 long standing history of global and launching 1st of their kind investment products, including the 1st no load gold fund.

Operator

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?

Speaker 1

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. And 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.

Speaker 1

So Let's take a look at the S and P 500. It basically says it's a non event to go up or down 1%, almost 70% of the time. Over 10 days, it's 3%. And you could see that gold bullion is the same as the S and P 500. And if we go back 10 years ago, bullion was was more volatile 2 to 1 to what the S and P was.

Speaker 1

And the Dow Jones U. S. Asset Manager Index, it's got a daily volatility close to the S and 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.

Speaker 1

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. And we earn fees on basis points on the total assets that we manage.

Speaker 1

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.

Speaker 1

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 probably trade an ETF to get exposure to a theme. Next, please. I want to thank our institutional shareholders, Vanguard, Royce Investment Partners, Perid Capital, KWM and BlackRock. A couple of these other lineups are into index funds.

Speaker 1

And but still we thank them all for that we qualify and show up in their product lineup. Next, please. So as you know, I'm the CEO and Chief Investment Officer, and I've been in this saddle for about 35 years. It's interesting to watch how U. S.

Speaker 1

Global has been through different cycles of global booms and busts. But during this period, you know, I've owned approximately 18% of the company and 99% of the Bodie control. That's a technical part of having, 40 Act, rules, But, what's important about the I am the largest shareholder. Next. Yields are important to look at and then we track what happens with the 2 year, 5 year and the 10 year.

Speaker 1

And to share with you is that most The currency movement is off a 2 year yield and that impacts gold. So that's one reason why I follow the 50 day moving average on the yields and the you're going to build a new pipeline, the financing is usually off a 10 year government bond, a new gold mine expansion of a gold mine. It's off a 10 year government bond. So it's important to be able to track what has happened in over 10 weeks, which is 50 10 weeks of trading, which is a 50 day moving average to get a feel for these swings in these short term trades. And what you see here is the 5 year yield when it crosses above the 50 day, That is usually bearish.

Speaker 1

And you can see last year when the 5 year yield went above in May, that we started seeing Small cap stocks fall, microcap even more so. And we would be categorized, in fact, more of a microcap. Until October, then when rates seem to have peaked and the and as that was taking place, small cap stocks started that. I'm trying to highlight that there's a very strong inverse relationship with the 5 year yield and the dividends that you're paying on your stock. And Next please is to try to this sets into the motion here shows you that the Russell 2,000 looked like it had a breakout while rates were falling until the rates rising, that the small cap stocks started selling off.

Speaker 1

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 4th year going by 4th year of a presidential election cycle when you have a Democratic president and a Republican Congress, the market is usually up 8%. You have falling interest rates, not rising interest rates, odds are that it's 11%, 12%. So even with all the negative news, the math suggests that the, this time last year, I forecasted that based on the presidential election cycle, the markets would be up when you have this sort of balance of power. And it was, but it ended up closing up on the year.

Speaker 1

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 a fundamental approach to investing. And that has led us down the journey to create Smart Beta 2.0, each. And so it doesn't matter if it's a macro factor or it's a micro 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 U. S.

Speaker 1

Global. Next please. Our capital strategy, the allocation strategy, the yield, and the shareholder yield is a model that looks like the cash dividends paid plus the net share repurchase, net reduction divided by the market cap. That's another way of looking at it. And there's a fund manager, Mel Faber, that wrote a book on it.

Speaker 1

And he's picked stocks, and they seem to have 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. 2 is we manage expectations for new product launches, what's necessary us. And 3, we managed to preserve cash for future growth opportunities and market corrections. We have been stockpiling cash.

Speaker 1

We have been buying back our stock and strategically buy back the stock while using an algorithm on flattened down days. And 5, we discuss and review with the Board on a regular basis and keep in touch with our Board so they know, what we're doing and why. So this is Medbijn Faber, and he came up with this famous book and really pounded the table across America on the shareholder yield, 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 their cash flow that would be bought. If they're buying back stock, Warren Buffett has always believed that it's been a better than paying out dividends. But he has this unique model, which we look at and respect.

Speaker 1

Next, please. This is the model. Shareholder yield is 3 parts: cash dividends plus net purchase of your shares back and net debt reduction to cap. Next, please. So gross dividends.

Speaker 1

The company has paid monthly dividends since 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 2,008 crisis still be able to maintain paying dividends of how we manage our capital. But the yield rate now is 3.17%. I'm going to show you that it's below the 5 year, but that's okay because the buyback stock just takes the yield higher.

Speaker 1

The border, they can anytime they can always cut a dividend. They have that right if something comes up. Next, please. Share gross total shareholder yield is approximately 7.9%. Next, please.

Speaker 1

That 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 5 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 5 year a government bond, then buy a stock with a dividend yield that's less than 5% unless the yield less than sorry, 5 year yield, unless that dividend is increasing faster. So therefore, it will catch up and surpass the 5 year treasury yield over the next 5 years. So it's my first time as a money manager, research analyst actually was in 1970.

Speaker 1

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 5 year saying that they did outperform. So you have to look at that model in the context of how much has stock along with the dividend yield. Next, please. So you saw earlier that our total shareholder yield is twice what our dividend yield is more than twice, and it's higher than the 5 year government bond.

Speaker 1

So it is of great value and is and so another rational reason for buying a 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 these two names up. Is Whisseltrees 100% ETFs?

Speaker 1

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 4 times higher, or 3 times higher than what ours is. And and so it says that on a price to book relative valuation. We're undervalued relative to WisdomTree. Invesco looks a lot cheaper, But then there's other factors in that financial model.

Speaker 1

There's number one factor. The return on assets, as you can see, the return on assets by WisdomTree was greater, than ours, but were greater, both of us, than Invesco. And that's one reason why Invesco trades a lower price to book. And then pre tax margins, for Wissentree, they're higher, but would afford a higher PE ratio. We are much higher than, say, Invesco.

Speaker 1

And then we look at dividend yield and compare. And as you can see that the lowest dividend yield is WisdomTree and then we're in the middle between Invesco. And our price to cash flow is about the same of WisdomTree. It's higher than Invesco, but it appears that has other losses that they're wrestling with. And this is sort of the gambit.

Speaker 1

These companies are bigger. We'd be a micro Wizardry be a mid cap and Invesco be a mid cap of, probably no mid cap going into a big cap range. And I think it's just a helpful comparative analysis. It has some basic quantum mental approach that analysts would take a look at it picking 1 stock versus another. Next, please.

Speaker 1

So why we buy back our shares? So, I have a tremendous respect for. Bruce is always articulating it and I want to point out that the company's stock is undervalued and therefore buys back shares of gross stock when the price is flattered down on the previous trading day. And as Warren Buffett highlights the value proposition of buying back one stock at value accretive prices. Doing so, Buffett says, benefits all shareholders, and we agree.

Speaker 1

Next, please. So the current shareholder repurchase program for the quarter ended December 31, 2023, the company repurchased a total of 196,295 shares Class A shares $160,000 We bought back about 1% of the outstanding shares since September 2023. And this may be suspended discontinue as I think what's important is that you can only buy back a certain amount of the volume. So the volume picks up, then we can pick up more. There's always sort of regulatory borders in sports, they call them and hockey blue line or red line.

Speaker 1

So you have to sort of manage within the boundaries. I've been asked why don't you buy back more because it's relative to this model of what the volume is. Next, please. This is another illustration to show that, we have increased our stock buying back. You could see in the year of 23 substantially from 2021 and for 2022.

Speaker 1

From 2021, just as COVID was ending, you can see that it's quite a big number. It's more like 12 times increase. Next, please. So let's look at a fiscal year 2024 of the strengths. The company remains profitable despite challenging macro market conditions.

Speaker 1

I'm going to highlight unless you're in the magnificent 7. A few stocks were champions of the overall market. The company continues to buy back stock on flattened down days and pays a monthly the company has a strong balance sheet, which includes both cash and other investments. Next please. With Nisland Nasdaq, we booked 2,000,000,000 in assets, 2,000,000,000 at quarterly operating revenue.

Speaker 1

Next, please. Earnings per share, the market's bump from the summer, year end of Q3 end of September. The markets rallied as rates were coming off and the assets and also certain write downs in that past quarter because we do have investments that go through a mark to market process of write downs and write ups. And so you can see that the increase in investment income was 1,900,000,000 Next, please. And by the way, on on word granularity, Alisa can always answer any questions and go into greater detail.

Speaker 1

Operating income, as you can see, it went from 215,000 The decrease in operating revenue is due to a decrease in assets under management, partially offset by decrease in operating expenses. Next, please. Well, there's this whole idea of Smart Beta came to the realization that I love math and quantum. We're quant focused on how we look at stocks and a fundamental is a new word that comes out, Investopedia covers it. But it's an investment strategy that combines both fundamental tools along with quant approach to picking stocks and building a diversified portfolio.

Speaker 1

So our fundamental investment strategy combines both cutting edge technology and robust data analysis to help optimize returns and manage risk effectively for our shareholders. We believe use of smart beta 2.0 factors in our thematic fund lineup sets us apart from the competition. It's really important that there are some factors that are great for picking stocks. Other factors are not, but they're good for screening stock. And then there's a magic about what portion of the portfolio is going to have mean reversion and what portion of the portfolio is going to have momentum of growth in revenue or income, and they're both laws of physics.

Speaker 1

So the portfolio construction is this is critical as the factors for picking the stocks. Next, please. So the thematic lineup of Smart Beta 2 point all ETFs. Jets was the first. It's done its thing.

Speaker 1

It's done what the bogey that we went up to beat, the index and that quant approach has done a phenomenal job. It is deeply undervalued on a relative basis to trains and trucks. The Dow Jones transport includes a much bigger weighting in trains and trucks. And if you just had and trucks, the PE ratios, the cash flow ratios, etcetera, are much more attractive value proposition. But the concerns of a recession, the negative news that's out there has impacted the in particular, institutional investors out of that of Europe that we have been able to witness.

Speaker 1

Overall, the retail and the family offices and big RIAs in the US are still actively involved in jets. Go AU, it's done it. So proud of it because it's outperformed the GDXJ. It's done what the model suggested it would do, both construction of 30% focused on gold royalties and then stock factors for bottom up stock picking and rebalancing each quarter. Our newest addition to the lineup is sea cargo shipping and heavily weighted towards shipping with a small portion of the portfolio into airline cargo only shipping.

Speaker 1

And I think what's interesting is that last year Due to all the drama that's taken place in Russia, it impacted our Eastern European fund. Even though we sold all of our Russian stocks before the war And before they became basically insolvent holdings, we were very fortunate for our shareholders that we went liquid very early, but it didn't matter. People are sentiment, people would rather speculate in technology stock than be in the growth of Eastern Europe. And further, same thing with the great concerns out of China and its bullion tactics. It's impacted the China fund.

Speaker 1

And so we shut down those 2 funds, mutual funds in the summer. And I think it's been a wise decision for the shareholders and for us. And but how do we play this emerging market thesis, which has been so important relative to the world of gold and luxury goods, etcetera. So one of the things to this journey of building jets and what we witnessed is that cargo is one of the best arteries that understand the whole economy, the global economy. And it has a strong correlation to PMI and they value relative, cargo ships trade, like jets do.

Speaker 1

They're on PE ratios and cash flow and the dividend yields on the cargo that much it I said, okay, how do we have a footprint for the global economy? What's the best trade off between any emerging country exporting products to a manufacturing hub and then selling them back? It was cargo airline cargo shipping and, and that's what we created C. Next, please. So the shipping industry is a leading indicator to the health of the global economy and one way to play emerging markets.

Speaker 1

Next, please. And it's highly correlated to a great leading indicator index. And what did we see, this last year was is getting strong, a great contraction in PMI. That was a Ford teller warning of a slowdown in the global economy. And I think that every time this happens, governments panic and they start printing money.

Speaker 1

And this year, 40% of the world's population over 70 countries are going to go through election. In addition to America, which is the biggest GDP in the world, it's going through its 4th year a presidential election cycle. It's important to recognize that over 70 other countries are going through an election cycle. And that Usually is for the economy to get the votes and drop interest rates. So I think an uptick in the PMI, it appears that it's bottom, A sustaining run would be explosive to this category, and bullish for The emerging markets.

Speaker 1

So again, another thing to recognize at war or bottlenecks, whatever takes place in Panama Canal or the Red Sea, It gives tremendous pricing power to the cargo shipping companies, and they put on a great spot here, a run 7. No, probably about 5th 14 weeks, a run drama that's taking place in the Red Sea. So I think it's interesting to show you that choke points The world still continues has to move blood through the arteries of the global economy. And these guys, all they do is have pricing power. Next, please.

Speaker 1

So this is a outline that JET's, the overall as of ETF. We saw assets decline, redeem, and the bulk of those seem to be that use jets as a proxy. Next, please. Chinese stocks significantly underperformed Asian peers. As you can see here, Taiwan because the semiconductor business has done well, but not Hong Kong and China.

Speaker 1

It's had a very rough year, as China's very much more like rather than trade and economics against the technology sector. Now they're wrestling with subject debt as a percentage of GDP and real estate and holding around the leadership. So I think that shutting down the last, early summer was a wise decision from a broad macro theme point of view. Next, please. Tech stocks distort performance of the S and P.

Speaker 1

The S and P other S and P index, and it's equally weighted. 500 names equally weighted, and you can see it far underperformed, but the market cap weighted. Next, please. The next question comes from the line of Magnificent Seven. They're up 5.4x as much as the equal weighted NASDAQ Index since January 2020.

Speaker 1

I mean, it's quite incredible to see what the especially the growth of NVIDIA, what it's done and everyone else jumping into AI. Next, please. So Groen's investment in Hybe Digital. Hybe also has infrastructure build out in the AI business. That's been a very attractive investment, paying monthly principal down payments every quarter.

Speaker 1

The yield on has been much higher than you would earn on a 5 year or a 10 year government bond. So we've been very happy, with that. And next, please. I'm going to turn over to Lisa Kaller, CFO. They could be more granularly on the numbers.

Speaker 2

Thank you, Frank. Good morning. First, I'll start with our financial highlights on the next slide. Average assets under management were $2,000,000,000 for the quarter ending December 31, 2023. Operating revenues were $2,800,000 and our quarterly net income was $1,200,000 which was an increase of 45% over the prior year same quarter and our earnings were $0.09 per share.

Speaker 2

The next slides will provide more detail of the results of operation for December 31, 2023. So on Slide 37, we see our total operating expenses of $2,800,000 for the quarter, which was a decrease of $910,000 or 24 percent from the $3,700,000 from the same quarter last year. The decrease is primarily due to decreases in assets under management, especially in our JETS ETF, as Frank discussed. Operating expenses for the current quarter were $2,600,000 a decrease of $194,000 or 7%, primarily due to decreases in employee compensation and benefits of $168,000 or 15% mainly due to decreases in bonuses. On the next slide, we see our operating income for the quarter ending December 31, 2023 is 192 increase of 716,000 compared to the same quarter for fiscal year 2023.

Speaker 2

You can also see that our other income increased $1,300,000 compared to the prior year. Unrealized gains on equity securities in the current quarter for $279,000 compared to unrealized losses in the prior year of $937,000 Net income after taxes for the quarter was 1.2 dollars per share, which was an increase of $382,000 compared to the net income of $847,000 or $0.06 per share. On the next slide, we see that we still have a strong balance sheet. It includes high levels of cash and securities. And on the following page, we see that we have a net working capital of 38,300,000 is an increase of 840,000 or 30, 2023 and our current ratio is 18.8 to 1.

Speaker 2

With that, I'll

Speaker 1

turn it over to Lisa

Speaker 2

to discuss marketing and distribution initiatives.

Operator

Thank you, Lisa. All right. On the next slide, I want to briefly point out some of the upcoming events that US Global will be attending or speaking at. ETF exchange where our head trader will be headed to next week in Miami and then following that the week after Frank Holmes will be attending and speaking at the for clubs investment. There, he will be sharing his thought leadership on the various industries that and how to gain exposure to these industries via our funds.

Operator

And then in March, Frank will head over to Zurich for the Swiss Mining Institute, where he will be speaking alongside other industry leaders in the gold and precious metals space. Then on the next slide, I want to point out a quick stat about our site traffic during the quarter ended December 31st. We've had, over half a 1000000 visitors from around the world visit usfunds.com. Repeat visitors, but even more new visitors, many of whom came to read the award winning Frank Talk blog or sign up the investor alert newsletter. We've seen tremendous growth in subscribers on for, for the last several months.

Operator

Then moving on to the next slide, don't forget that our educational content does not only come in the form of the Frank Talk blog or the investor alert newsletter. We love educating our shareholders through video content as well. So make sure you're subscribed to our YouTube page to get video updates on everything from gold to airlines. As we wrap up today's presentation, I just want to Remind everyone that we do share a majority of our new content as well as announcements about upcoming events across all of our social media platforms, which continue to grow across the board. Then on the next slide, I just encourage you to follow us on all of these platforms so you stay up to date with what's going on with Grow, our funds, and our broader market insights.

Operator

And then just as a friendly reminder to our audience as we wrap up today, if you do have any questions, please email those to infousfunds.com and we will gladly follow-up with you to get anything clarified that you may need more information.

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Key Takeaways

  • Frank Holmes highlighted the importance of each asset class’s “DNA of volatility”, noting that gold’s volatility has aligned with the S&P 500 over the past decade.
  • US Global is prioritizing ETFs (JETS, GO AU, CHATS) as they continue to capture flows from mutual funds, particularly among younger investors.
  • The firm’s capital strategy includes opportunistic share repurchases (196,295 Class A shares in Q2) and a total shareholder yield of ~7.9% (3.17% dividend yield plus buybacks).
  • Its thematic Smart Beta 2.0 ETF lineup now spans airlines (JETS), precious metals (GO AU) and the newly launched sea cargo shipping fund (CARGO) using a blend of quant and fundamental factors.
  • CFO Lisa Calicott reported Q2 average assets under management of $2 billion, operating revenues of $2.8 million, net income of $1.2 million (up 45% YoY) and a 24% reduction in operating expenses.
A.I. generated. May contain errors.
Earnings Conference Call
U.S. Global Investors Q2 2024
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