This is a reveal of a secret that probably isn’t secret for most of you at this point, but I’ve been asked by many folks to chime in… so I’ll give it a shot.
Dan Ferris is selling his Extreme Value newsletter with a long spiel that looks like it was only sent out to other Stansberry subscribers, not a “hard push” with a hype-heavy video like we more typically see, and it’s essentially a “now is the best time for real” re-recommendation of a stock he has been touting for about 2-1/2 years.
Here’s what Ferris said in the email:
“In today’s Digest, I’m going to tell you all about an opportunity to make 20% to 50% gains in the next several weeks… and as much as 15 to 20 times your money over the next several years.
“But the truth is, I thought I’d have more time to get the message out when the time came.
“You see, the company made two important announcements earlier this week. These developments will likely soon send the company’s stock soaring much higher. And because of that, your best chance at the biggest profits could be gone in just two to three weeks.
“That’s why I’m breaking from my usual Friday Digest fare this week…
“My Extreme Value subscribers already know all about this opportunity. But I don’t want to stop there… I want to help you, our dear Digest readers, to profit as best I can, too.”
So this is an existing stock, and we know what it is (more on that in a minute), but the immediacy is that there’s a huge catalyst. That catalyst was announced early last week, so you’d think that it would have impacted the stock, but the real impact to the stock came when this email was sent to presumably 100,000+ Stansberry customers over the weekend. A catalyst combined with a heapload of new investor attention from people expecting a short-term bump can really create a self-fulfilling prophecy and jolt a stock price.
This is what Ferris wrote on Saturday, per emails that were forwarded my way:
“I’m writing about this opportunity today because I’m afraid the stock will soar out of sight in the next four to five weeks. As I’ll explain, that’s because I believe a whole new class of the world’s biggest institutional investors will soon pour tens of millions… hundreds of millions… and eventually, billions of dollars… of investor capital into the stock.”
So the news is that the stock is going through a consolidation and looking to get a US listing, and that did indeed cause a little bump in the shares, getting them briefly to a new 52-week high on Thursday… but Ferris’ email on Saturday drove enough buying that the stock got to $45 on Monday for a new seven-year high.
What’s the stock? This is, of course, the Canadian natural resources-focused asset manager Sprott, Inc. (SII.TO, SPOXD/F), which Dan Ferris first started teasing in February of 2018 and then kept trotting out every few months until he came out with a new version of the Sprott tease last fall.
The original reason for choosing Sprott was built largely around the fact that they were changing the business pretty dramatically in early 2018, buying out the Central Fund of Canada to substantially increase their exchange traded assets under management (ETFs and Closed-End Funds), and Ferris pitched the management fees on that ETF money as being akin to a “royalty” … and since it’s essentially all physical gold and silver in those ETFs (with some mining stocks, though Sprott’s equity ETFs are tiny), it’s sort of like a mining royalty without the mining. I paraphrase there, but you can read my longer piece when Ferris initially made this pick for more detail if you like.
There’s some solid logic there, and I owned Sprott for a while because I thought it was likely to get more attention if they could draw in more assets to their ETFs and other managed investments, and therefore create some real leverage to the gold price.
That leverage is just math — ETFs and mutual funds charge a management fee that’s a percentage of the asset value of the fund, and if gold and gold stocks rise, the value of the fund rises and the management fee rises with it, without doing any additional work… and of course the reverse is true as well, if gold falls the management fee income falls.
But there’s a second bit of leverage that I thought might come into play, and it didn’t while I held the shares but may be starting now — that’s if the funds they manage attract new money. ETFs and Mutual Funds can just create new shares to accommodate new investors, buying new stocks or bullion to back up those shares as they go, and therefore increasing the asset base and the fees… and in a gold mania, money tends to rush into gold ETFs, so there could be that extra bit of leverage as gold goes up and more money flows into the funds.
The other big change Sprott has made in the asset management business was buying Tocqueville Gold Strategies last year and rebranding John Hathaway’s longstanding Tocqueville Gold fund the Sprott Gold Equity fund (SGDLX SGDIX). That’s one of the longer-running and more institutionally-respected mutual funds that focuses on gold mining stocks, right up there with First Eagle Gold (FEGIX), though all of the mining-focused mutual funds are pretty small compared to big traditional equity funds (mining is a small piece of the stock market, it’s a rare gold stock fund that has much more than a billion dollars in AUM). So that Tocqueville buy adds a little more than a billion dollars in AUM to Sprott at a relatively high management fee (1.47%), which will help, I don’t know how much of that money flows to Hathaway and his managers but Sprott will certainly get a chunk.
Asset managers depend on growing their asset base and on investing in things that go up in value, and investors tend to chase performance. That brings leverage to asset managers, particularly those who are focused on a relatively narrow area like Sprott (which used to also offer a wide range of equity mutual funds in Canada, but sold off essentially all of them to focus on natural resources and mining stocks a few years ago). And that means the best results come from buying these kinds of investments in a bad part of the cycle and selling them in a good part — all of the mining equities and asset managers who focus on mining equities have had seven or eight generally disappointing years since the price of gold peaked in 2011 and 2012, boosted somewhat by the quick run gold made in the first half of 2016 and then by the more recent recovery in gold in the past few months.
While gold and gold mining stocks were mostly falling from 2013 to 2019, investors were also selling their shares of the funds that own those stocks (and bullion), so the negative part of leverage kicked in as AUM fell more sharply than gold itself. That impact is seen most severely in the highest-profile funds, so SPDR Gold (GLD) saw its share price drop by about 35% as gold fell in the few years into 2015, but the assets under management for that fund fell by 70% because investors sold their shares and many more ETF shares were destroyed than created.
So what does that mean for Sprott? Well, if we’re at the beginning of a new gold bull market because the Federal Reserve is going to destroy the value of the US$ through all of the rescue and subsidy spending to try to save the economy, then it will probably work out really well for Sprott even if there’s another crash to come — gold and gold stocks do get sold during the ugliest days, and the gold funds sold off almost as hard as everything else in March during the “sell everything” panic, but gold also tends to rise out of the ashes over the years following a crisis, probably because investors are scarred and remain afraid (and because the government usually spends like mad to try to escape the crisis, which should depress the currency and eventually create inflation).
In the short term, though, what it means for Sprott is that they are catching up with the gold stocks thanks to this plan to list in New York (and as of Monday, thanks to Dan Ferris). Partly that’s because they did their 10:1 share consolidation to get the share price up to a “grown up” level in the $20s and $30s, and that opens up the stock for some institutional investment (institutions often have rules against investing in low-priced small caps)… and partly it’s just because a NY listing will bring a lot of attention and also bring in more potential US investors, perhaps even passive investors if Sprott shares get included in any indices. The announcement was made by Sprott on May 26, and the consolidation took place on the 28th… with the listing in New York expected to happen by the end of June (if everything is approved and remains on track, they expect to bring their SII ticker to NY with them).
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Before this, they were pretty steady, likely to be levered to gold and small enough to move quickly, and they paid a solid dividend to help make you patient. That wasn’t enough for me and I sold my Sprott shares a while back, leaving my gold exposure to stocks that are more cleanly levered to gold (royalty companies Sandstorm Gold and Royal Gold are my primary investments in that space right now). Here’s what I wrote to the Irregulars in November when my Sprott shares hit a stop loss trigger and were sold:
“I originally bought Sprott because I thought they might provide some good leverage to a gold bull market, but I don’t actually like the company very much (asset management is a lucrative business, but in most ways it’s also a dying business as margins should be constantly compressed) — I would have kept holding through the volatility just because they pay a dividend, but since they also hit my stop loss level and I don’t have any long-term conviction about this company, I’ll take this signal and walk away from my small Sprott position with a decent profit. I do not, of course, know where gold is going in the next six months — but if we’re going to see gold rise dramatically again, I have a lot more confidence in the royalty companies than I do the asset managers.”
This latest jump in the share price on the NY listing news and the Ferris re-tout means that thinking was all for naught — Sprott has now caught back up with many of the royalty stocks after drastically underperforming for most of that period, and thanks to the bump on Monday has, like RGLD and SAND, provided roughly 2X leverage to the gold price since I sold in early November. Here’s what that looks like in chart form — that’s Sprott in blue, Sandstorm in green, Royal Gold in orange and perennial royalty blue chip Franco-Nevada in red, gold is that steadier line in the middle in purple.
The New York listing is very likely to help, there’s so much money sloshing around on the NYSE that almost any decent company that gets listed in the US and can get “discovered” with any kind of story that appeals to investors (and “leverage to gold” counts as a story) can certainly get a lift from being included in that much larger market — especially if they’re a fairly unique story. Sprott is the only real “pure play” asset manager in precious metals, so there’s certainly some chance the stock could take off in New York if people are excited about gold at that moment — I imagine there’s a limit to that, but I don’t know what the limit is. Sometimes the mania of a new NY listing can approach real IPO levels if the story catches fire, even if all the people who could easily have been buying Sprott in Toronto for ten years ignored it until they saw Eric Sprott ring the bell on the NYSE. I just had a different holding, the gambling technology company GAN, get their long-anticipated NY listing recently, and that one, which is even smaller than Sprott, jumped far higher than I expected (coincidentally, it’s a stock I found while researching a different Stansberry teaser back in February, though I didn’t actually buy shares until a month later).
The optimistic case is that a NY listing lets Sprott also raise more capital at a higher valuation, and invest more heavily in the business to acquire more assets, and that creates a flywheel of returns because of the inherent efficiencies of scale that an asset management company enjoys as it grows (the same team can manage $500 million or $5 billion without a big difference in costs). That’s certainly possible, though I don’t know what their plans are — if gold is on a strong rise for a few years that would provide a nice tailwind, and if gold falls again it’s possible that they’ll be able to acquire more assets, like that Tocqueville fund, at relatively appealing prices.
The pessimistic case is that they’re competing against much larger organizations for investor and institutional funds, and they might lose that competition. Particularly in the ETF world, they have had trouble attracting new funds to their mining ETFs or their precious metals ETFs, despite the “twist” they put on the metals ETFs (that they are redeemable for gold for some large investors, which lets them argue that they are not “paper gold” like the much larger ETFs). That has finally started to change, the ETF I watch for this is the Sprott Physical Gold Trust (PHYS), and that has seen assets under management climb with gold’s surge this year to finally show some of that leverage — it’s not taking share from the much larger gold ETFs iShares Gold Trust (IAU) or SPDR Gold Shares (GLD), but it is attracting new money, and that’s a big deal. Here’s the chart illustrating that point — this is the price of those three ETFs, which should follow gold almost exactly, and the assets under management for those three ETFs, which would follow gold exactly if they weren’t creating or destroying shares — and while GLD still attracts most of the attention, you can see that both IAU and PHYS are attracting plenty of new capital thanks to the surge in gold prices this year.
The risk, and the opportunity, is that Sprott is a minnow compared to those guys — iShares and State Street are two of the most institutionally connected ETF managers in the world, and those ETFs are the brand names, Sprott is an afterthought when it comes to bullion and their effective management costs are substantially higher, which means they probably won’t “catch up” (Sprott’s ETF has about $4 billion under management, iShares Gold $25 billion and the GLD ETF over $60 billion)… but there is certainly room for them to grow if they can build their brand awareness beyond the current crop of real gold enthusiasts who already follow Eric Sprott and Rick Rule.
So it should be an interesting ride. I don’t have deep connections to Sprott like Ferris does, so I don’t have a well of confidence in them like he does, but they have done a good job restructuring the business to focus more on gold and mining, which gives them a chance to hold their niche and not have their brand competed away in the world of indexes and falling fees, as is happening for so many other relatively small asset managers. I don’t know if the Ferris bump will persist through their NY listing, but it did suddenly turn into a more interesting story… we’ll see how the summer goes, and how things shake out in the gold market. I’m still more confident in the royalty company stocks when it comes to my long-term gold exposure, but those are also trading at much higher valuations than usual now… and it’s nice to see Sprott catch back up a bit this year.
FYI, though the stock has surged this week, there’s still some room to “catch up” if you think Sprott should do as well or better than the gold royalty stocks — here’s what the big three (SAND in green, RGLD in orange and FNV in red) have done vs. Sprott (blue) in providing leverage to gold (purple) since this Ferris recommendation first came out in late February of 2018…
No great new wisdom from me, I’m afraid, but that’s the story I see with Sprott — if you’ve got thoughts on the stock, reasons to buy or avoid, or want to share your gold investment strategies, by all means, use our friendly little comment box below to chime in. Thanks for reading!
Disclosure: As of this writing I own shares of Sandstorm Gold and Royal Gold among the stocks mentioned above, and have funds invested in the iShares Gold Trust. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.