Editor's Note: Below is an excerpt from a recent institutional research note written by Hedgeye Financials analyst Jonathan Casteleyn. For info on how you can access or institutional research email firstname.lastname@example.org.
We Maintain our Short Recommendation
After a short covering rally that started in 3Q17, WisdomTree (WETF) fundamentals are again succombing to share losses within the international hedged category and more importantly to unhedged international ETFs run by BlackRock. With a 2 month trend of accelerating declines in WETF's main funds, we are weary of an extended soft start to 2018 for this expensive stock which continues to be under the thumb of a weak US dollar.
Strong trends through November, or two thirds of the way through 4Q17, have now reversed course, with WisdomTree funds now working on another soft month of fund flow to start 2018. November 2017 subscriptions totaled +$410 million which put the running 4th quarter period at that time, at a solid +$1.0 billion inflow. However December fund flows all but reversed that trend, tallying redemptions of -$771 million, which have been followed by -$583 million in losses during the first 14 trading days of 2018. International hedged products or the firm's Hedged Japan ETF (DXJ) and the Hedged Europe product (HEDJ) continue to be the culprit of these declines with redemptions of -$1.0 billion combined in December alone and totaling a -$942 million loss thus far in January. These important products for WETF are again giving way to a declining US dollar, as resulting foreign currency gains are hedged out by WisdomTree ETFs.
Our ETF Industry Trackers are outlining that WisdomTree continues to fight a two front war, not only losing incremental share to competing hedged products at BlackRock and Deutsche Bank, but more importantly to iShares ETF products which are unhedged. In our charts below, we highlight the unhedged Japanese BlackRock ETF, the EWJ, having taken in +$3.9 billion during the past 4 months in comparison to the -$207 million lost at DXJ. Within European products, the unhedged EZU from BlackRock has raised +$1.7 billion compared to the -$1.6 billion redeemed at HEDJ over October, November, December, and January. In hedged ETFs, WETF continues to lose incremental share to both BlackRock and Deutsche with share in both Japan and Europe now below 80% in both products.
At 40% of the firm's assets-under-management, the drastic redemptions at DXJ and HEDJ continue to create a drag on results. With an ongoing soft outlook for the US dollar, we are extremely cautious on current WETF trends.
Our fair value range stands at $9 per share or 20x our WETF 2018 earnings estimate of $0.45 per share. With the forward dividend yield of 1.0% against an average AUM sector yield of 2.9%, WETF shares have the second lowest distribution in the sector behind Gabelli (GBL). We are maintaining our short-view based on persistent market share gains by BlackRock and fears of industry pricing weighing on long-term valuation. WisdomTree trades at 28x forward earnings or exactly double the asset management group average of 14x, which is too much of a premium considering current negative trends in our view. The company reports 4Q17 earnings on February 2nd, 2018.
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