Is It Time to Buy WisdomTree Investments?

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WistomTree Investments (NASDAQ:WETF) is a publicly traded asset manager that offers a wide array of exchange-traded funds. After more than doubling last year, the stock is already down 30 percent year to date. Is now the time to get in?

Before addressing this question, let’s see why the stock performed so well  in 2013, as it is important to understanding the company going forward.

Before last year, WisdomTree had several ETFs out there but they were small, and they were not leaders in their asset classes. True, certain funds were becoming more popular given their emphasis on dividends, but in general these funds appealed to those investors who wanted to utilize ETFs in order to enhance long-term returns. But the most successful ETFs on the market, such as the SPDR S&P 500 ETF (SPY) or the SPDR Gold Trust (NYSEARCA:GLD), were primarily used by traders as alternatives to futures contracts.

Nevertheless, WisdomTree believed that creating funds that emphasized certain strategies like overweighting higher dividend payers or designing funds that excluded financials would pay off.

One strategy the company offered to investors was offering foreign stock market exposure with currency hedges. One of these funds, the Japan Hedged Equity Fund (NYSEARCA:DXJ), was long of Japanese stocks, but it held derivative contracts that would benefit from a fall in the value of the Japanese yen.

The strategy makes sense because if a nations’s currency weakens, then by comparison it makes that nation’s stock market look stronger since these stocks are priced in the nation’s currency. So if stock XYX is worth $100 and the dollar loses half its value, it should take twice as many, or $200, to buy the same stock. However, the strategy can also backfire, because if a nation’s currency weakens, then foreigners might divest their holdings in that country, and it is possible to see a weak stock market along with a weak currency.

Sure enough, the strategy paid off when Japan’s central bank began its own quantitative easing program. The Japan Hedged Equity Fund began to soar. So did investor interest in the fund, which grew into one of the most popular ETFs in the world in a very short period of time. The growth was so tremendous relative to the size of WisdomTree’s total portfolio of ETFs that the company’s assets under management grew at an extremely rapid pace. This metric is crucial for asset managers because they earn a fee that is correlated to the amount of assets they manage.

As a result, WisdomTree’s sales and profits soared. Profits soared from $11 million in 2012 to $52 million in 2013. Given this incredible growth, investors started to price in an extremely rapid growth rate, and as a result, the stock was trading at around 60 times earnings.

But a careful analysis of the company revealed that while WisdomTree was growing its assets under management, the real growth rate would have been much slower assuming that the Japan Hedged Equity Fund hadn’t seen such a rise in popularity. In fact, so far this year WisdomTree’s assets under management have actually fallen slightly.  This is due to the fact that the Japan Hedged Equity Fund is down for the year by nearly 7 percent.  The amount of assets held by this fund has fallen even more. This has dragged WisdomTree shares down 30 percent for the year.

It seems that WisdomTree shares are dependent on the success of the Japan Hedged Equity Fund, and to a certain extent, this is true. But one positive development we have seen in the past quarter is that this dependence is diminishing. Despite weakness in global stock markets, WisdomTree’s assets under management have actually risen for the year if we exclude the Japan Hedged Equity Fund, and this speaks to the fact that WisdomTree’s products are still in demand.

Ultimately, in 2014 we are going to see very weak comparisons with 2013. Asset under management growth is going to slow dramatically, and we may even see a year of declines. But the long-term picture for the company remains very promising. ETF investing is still growing in popularity. WisdomTree ETFs offer investors unique exposure to foreign stocks and bonds, and it continues to focus on dividend paying stocks both domestically and abroad. This is going to drive growth going forward.

While I like the company’s long-term prospects, I still think the shares are overvalued. Not only are 2014 comparisons going to be weak when we look at revenues and assets under management, but the company is expanding its business abroad this year, and this investment is going to eat into margins.

Investors who focus on basic metrics and who felt the stock was worth buying based on its 2013 growth are going to become frustrated with the company’s weak performance based on these metrics, and this will send the stock lower. Thus, I would hold off on buying the shares for now, but this is a name you want to keep on your radar and buy on weakness. Although it seems like a long fall from here, I think $9 per share is an extremely attractive entry point for long-term investors.

Disclosure: Ben Kramer-Miller has no position in WisdomTree Investments or the ETFs mentioned in this article.

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