Will WisdomTree (WETF) Stock Decline Post Q2 Earnings?

WisdomTree Investments, Inc. (NASDAQ:WETF) is scheduled to report second-quarter 2016 results on Jul 29.

Last quarter, this New York-based exchange traded fund (“ETF”) and exchange-traded product (“ETP”) sponsor and asset manager’s earnings came in line with the Zacks Consensus Estimate. Results reflected revenue growth and stable expenses. Notably, the company witnessed decline in U.S. listed ETF assets under management (AUM), mainly driven by net outflows while recording a significant growth in European listed AUM.

Industry wide weakness and global concerns were further fueled by the recent Brexit referendum which took a toll on the finance stocks with WisdomTree falling nearly 28% year to date.

Will the upcoming earnings release put further pressure on WisdomTree stock? It majorly depends whether the company is able to post improved profitability for the second quarter. Notably our quantitative model doesn’t call for an earnings beat this time around. Here is why:

A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for WisdomTree is -28.57%. This is because the Most Accurate Estimate of 5 cents is lower than the Zacks Consensus Estimate of 7 cents.

Zacks Rank: WisdomTree has a Zacks Rank #4 (Sell). As it is, we caution investors against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement.

WisdiomTree’s activities during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 7 cents over the last seven days.

Factors at Play

On May 16, 2016, the company revealed that it has accelerated the buyout of the remaining 25% stake in the European entity – WisdomTree Europe. In this connection, the company will take a charge of around $6.0 million or 4 cents per share, in the second quarter to reflect the acquisition of the stake and other associated expenses.

The beginning of 2016 has been quite tough for WisdomTree as it was hit with $5.4 billion outflows during the first quarter. The outflows have been mostly driven by international hedged products, particularly the company’s major currency-hedged funds – WisdomTree Europe Hedged Equity Fund HEDJ and WisdomTree Japan Hedged Equity Fund DXJ.

The second quarter is no different as the company continued to record elevated outflows. While flows in HEDJ and DXJ which constitute around 45% of the company’s AUM will reflect continued weakness, the company’s other hedged and unhedged international equity ETF may remain stable.

WisdomTree remains focused on executing its strategic growth initiatives including expansion of distribution capabilities, investment in technology, launch of innovative products and addition of personnel. Given such initiatives, we expect marketing and sales expenses to trend higher in the second quarter.

Considering the heightened volatility around flows, a key area to look at will be compensation expense level during the quarter. Management expects a compensation expense of 24–28% for the year.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

LPL Financial Holdings Inc. (NASDAQ:LPLA) , which is expected to report on Jul 28, has an Earnings ESP of +2.33% and a Zacks Rank #3.

Federated Investors, Inc. (NYSE:FII) has an Earnings ESP of +2.13% and carries a Zacks Rank #3. It is scheduled to report results on Jul 28.

Golub Capital BDC, Inc. (NASDAQ:GBDC) has an Earnings ESP of +3.23% and carries a Zacks Rank #3. The company is expected to release results on Aug 3.