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Wisdom Tree Investments

06/25/13 04:06:44 PM
by Billy Williams

ETFs are all the rage but one company which develops ETFs is a better play and is in a stage two bull run.

Security:   WETF
Position:   Buy

In an investment landscape flooded with broad options for investments such as currencies, energy sectors, precious metals, and more, several exchange traded funds, or ETFs, have popped up to give average investors the opportunity to invest in these varied options. One company, though, Wisdom Tree Investments (WETF) has a long line of ETFs available that it licenses to its different partners as well as offering advisory services since 1985. But, the ETFs it offers to investors pales compared to the opportunity of investing in WETF.

WETF operates as a sponsor and asset manager for ETFs, offering selections in equities, currency, fixed income, and alternatives asset classes using its fundamentally weighted index methodology. WETF also licenses its indexes to third parties for proprietary products in addition to a platform to promote the use of Wisdom Tree ETFs in 401(k) plans.

As investors look for more options to help mitigate risk and round out a risk-adjusted panoramic portfolio in respect to old-fashioned modern portfolio theory, WETF's ETFs offer a solid product line making the company a solid ETF play.

Figure 1. WETF has travelled a long hard road to firm up its fundamental outlook. During the last six years, the company endured consistent losses and a painful contracted price range for its stock but it has reached a critical tipping point where it could emerge as one of the great growth stocks of the 21st century.
Graphic provided by:
The road has been rocky, however. After six years of losses, WETF recently scored a profit of three cents a share in 2011 on a 57% surge in revenue with earnings gowing 267% to 11 cents a share on 30% revenue growth.

Wall Street expects earnings per share to leap 245% to 38 cents a share this year with sales expected to jump 83%.

After-tax margin has stepped up in four of the past five quarters -- from 6.4% to 26.8%.

The jump in earnings growth during the last five quarters should scream volumes to any trader who is not in a coma as a stock that is preparing to begin a solid bull run.

Earnings growth is a huge indicator of something in the works. Like cooking gumbo, a good momentum stock has a lot of ingredients thrown in the pot, but if they are the right kind, then the end result is something satisfying and good.

Figure 2. Notice how the 50-day and 200-day SMA were flat for months but then in mid-November of 2012 established a bottom on exhaustive trade volume and then stormed higher, breaking through resistance and into a stage two bull run. As long as fundamentals stay strong and price action remains compelling to the bulls, WETF can be bought on any pullback unless those factors change.
Graphic provided by:
Earnings, then, are the best ingredient for a stock to break higher and emerge as a leader.

As WETF has been in a stage one base pattern during this time of firming up its fundamentals, in addition to the recent earnings growth, it has built up to a $1.4 billion market cap, has a healthy profit margin of 18.71%, an operating margin of 22.66%, a whopping return on equity of 37.35%, no debit, and 52 million in cash on hand.

Shares are currently trading at $11.77 but have a book value of $24.62, meaning that the stock is also undervalued with lots more upside potential.

The stock is currently in stage two where it has broken free of this contracted price range and is surging higher. The initial move appears to be just the beginning and any pullback is a buy-able event with more room to the upside.

The only thing that you have to watch for any disappointment is primarily in the realm of earnings and secondarily in annual sales.

Any news that speaks of falling short in these areas or coming in under estimates could result in the stock trading flat or down and you should exit your position.

If that happens, then stage three is in effect where the stock fails to go higher and then begins to breakdown.

In stage four, the stock reverses and becomes a short-candidate.

That said, as long as the fundamental outlook stays positive, the price action should continue to climb.

Buy any pullback and use a 7-8% stop loss as loss prevention.

Till then, the stock should be an impressive earner.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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