We are taking shares of WisdomTree (WETF) off of our Best Ideas list as a Short this morning. The rate of change in redemptions continues to improve and the complex may finally have a decent catalyst with a US dollar that continues to break higher. We still think shares are wildly expensive and that intermediate term earnings numbers need to come down, however it is now likely with record absolute short interest balances that even marginally positive near term trends can force the stock higher which is now the path of least resistence. Since the initiation of our Short recommendation on December 14th, 2015, shares have declined by -43% into Friday’s close. We now think the risk is to the upside and that the stock could see $11-12 per share in the near term.
The WisdomTree complex had a better week last week with the latest assets-under-management and daily subscriptions/redemption information disclosed over the weekend. In a respite from a nasty election week redemption of -$487 million, +$133 MM came into all products for the 5 days ending November 18th. Importantly, the inflow last week was broad based with +$84 MM garnered by US ETFs with even the troubled international hedged products taking in +$54 MM. Most importantly the rate of change of redemptions is drastically improving when looking at weekly average flows for all of 2016. First quarter 2016 trends averaged -$433 MM in weekly redemptions complex wide, which appears to have been the nadir. Albeit slowly, weekly redemptions have been improving since to -$359 MM for 2Q; -$197 MM for 3Q; and now are running at -$110 MM for 4Q. With this improving rate of change and now inflows in the middle of the fourth quarter, we think near term redemption trends may be bottoming.
While it is still too early to evaluate the new post-election environment, WETF stock generally does exhibit positive correlations to 10 year Treasury yields and also the US dollar. Over the past 12 months, trajectories of all 3 variables have moved in lock step however the recent breakout in the 10 year and the dollar has left WETF stock behind. Thus we think there is a delayed catch up trade coming for WisdomTree stock as a higher dollar supported by higher rates is better on the margin for some of its hedged currency products. This setup coupled with short interest balances now at new all-time highs, makes a squeeze higher more likely even if fundamentals are only slightly better. When we initiated our short recommendation, short balances were 16 million shares versus 32 million as of last week or 28% of float. For now, WETF shares are set up for upside and thus we are removing shares from our Best Ideas Short list this morning. We think we could see a $11-12 stock in the near term on short covering and a slight improvement in fundamentals. We will re-evaluate our recommendation at that time.
The rate of change in WETF weekly flows continues to improve. Although still negative for now, last week was a positive subscription across the board with both US and hedged international products taking in funds with weekly averages over the course of the year continuing to improve:
A stronger US dollar supported by higher 10 year yields may be new factors that play into the fundamentals at WETF. Over the trailing twelve month, all 3 variables have moved in lock step and the recent spike in yields and the dollar should push WETF shares higher:
Shares are now set up for upside (in the near term) on slightly improving trends and now record highs in short interest balances. We now recommend that shorts cover before a squeeze. Upon initiation of our Short recommendation last December, short interest balances were at their lows at 16.7 MM shares. They have now nearly doubled to 32.6 MM. For now, the stock is a better long:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Patrick Staudt, CFA