A return to its roots as a precious-metals focused asset manager and a foray into financial technology has sent shares of Sprott Inc. soaring in recent months − which has led some analysts to suggest investors take some profits.
Shares of Toronto-based Sprott, founded by well-known resource investor Eric Sprott, have surged by about 40 per cent over the past year to around $3.10, its highest level since mid-2014 and ahead of analysts’ consensus 12-month price target of $2.95. The stock has pulled back from a 52-week high of $3.55 on March 3, amid some analyst downgrades. The company missed some of the analysts’ fourth-quarter financial expectations, but the larger concern appears to be the stock’s recent run-up.
Among five analysts who cover the stock, three have a “sell” and two have a “hold” recommendation.
RBC Dominion Securities analyst Geoffrey Kwan recently cut his rating to “underperform” (similar to “sell”) from “sector perform” (similar to “hold”). “Our underperform rating does not reflect a view that there is significant valuation downside in Sprott’s share price, but rather that the share price appreciation year-to-date reflects the significant growth potential from the company’s re-positioning,” Mr. Kwan said in a March 2 note. Meantime, he increased his target price to $3.25 from $2.75.
BMO Nesbit Burns analyst Nik Priebe also downgraded Sprott to “underperform,” but stuck with his $2.75 price target. “While we recognize recent efforts to expand business lines, divest underperforming assets, and shift toward passive strategies have been constructive changes, we are concerned that recent enthusiasm might have caused investors to get out over their skis on Sprott,” Mr. Priebe said in a March 5 note. “Sprott remains one of the most active asset managers with respect to new product launches and business development efforts,” he added. “However, we await growth in net sales, a more fulsome draw-down of committed capital in the lending LP, and more attractive valuation before revisiting our thesis.”
Analysts at Desjardins have a “hold,” calling the shares “fairly valued,” according to a March 2 note. They bumped their target price to $3 from $2.50.
Sprott chief executive officer Peter Grosskopf sees stock’s recent rise as investors giving the company credit for its recent transformation, which included moves such as selling its Canadian diversified mutual fund assets for $46-million, acquiring Central Fund of Canada to add $4.3 billion in assets to its physical bullion and raising $640-million for its resource lending vehicle, Private Resource Lending LPs. It also launched a resource-focused merchant bank.
“When you talk to our shareholders,” who include Mr. Sprott, who stepped down as chairman of the gold-focused asset management firm last year but still owns about 10 per cent, “they are looking for exposure to a recovery in the sector without the extreme volatility that an underlying gold stock might have,” Mr. Grosskopf said in a recent interview.
He also believes investors are pricing in the potential of the company’s move into digital gold businesses, including its 20-per-cent interest in TradeWind Markets Inc., a digital gold trading and settlement platform backed by physical bars. Sprott will also be a dealer in the platform.
“The analysts are right, we’ve come a long way,” said Mr. Grosskopf of the company’s comeback. “But our shareholders are valuing things higher than that. They’re pricing in some potential here,” with both digital gold and a bet on a rebound in precious metals, in particular, gold as a storage of wealth.
Anish Chopra, managing director at Portfolio Management Corp., doesn’t own the stock given his firm’s focus on large-cap stocks, but said it could appeal to investors comfortable with small caps, resources and asset management firms.
Kash Pashootan, chief investment officer at First Avenue Investment Counsel Inc., doesn’t own Sprott either, choosing instead to get his precious metal exposure through the gold bullion-backed SPDR Gold Shares ETF. However, he said Sprott looks more attractive today than in previous years. “It’s a much more focused offering,” Mr. Pashootan said, suggesting investors interested in Sprott could consider taking a partial position at this point. “You need to exercise some patience with entry point when it comes to Sprott, strictly based on the fact that the shares have had a meaningful run,” he said.