When a stock jumps more than 25% in a single month, I usually find it becomes harder to decide whether to take profits or hold the stock. Strong momentum could signal that investors are finally recognizing an improving business, but it can also mean much of that optimism has already made its way into the share price. For example, Sprott (TSX: SII) currently sits in that precise position. The Canadian asset manager has enjoyed a powerful run in August while its underlying profitability has also strengthened.
In this article, I’ll weigh Sprott’s improving fundamentals against its recent rally and explain whether I think the stock is a buy, sell, or hold today.
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Sprott stock
If you don’t know it already, Sprott is a global asset manager focused mainly on precious metals and critical materials investments. Its business includes exchange-listed products, managed equities, and private strategies.
After jumping 95% over the last year, SII shares currently trade at $176.64 per share, giving it a market cap of $4.5 billion. At this market price, the stock also offers a 1.3% annualized dividend yield.
Strong earnings support the rally
Sprott’s improving profitability gives investors a solid reason to take the recent stock surge seriously. In the second quarter, the company’s management fees jumped 72% year-over-year (YoY) to US$76.4 million. That solid growth mainly came from much higher average assets under management, helped by net inflows and market value gains across many of Sprott’s investment products compared with the same quarter last year.
More importantly, the company’s quarterly net profit more than doubled to US$34.3 million in the latest quarter from US$13.5 million a year ago.
Still, one part of its latest report deserves caution as Sprott’s assets under management fell 15% sequentially to US$55.6 billion from US$65.1 billion at the end of March. Weaker gold and silver prices accounted for most of that decline, while precious metals products also experienced net outflows.
Buy, sell, or hold
The recent drop in Sprott’s assets under management is an important reminder that Sprott stock could see heightened volatility even when its underlying earnings are improving.
However, its longer-term growth picture still looks encouraging. The company’s average assets under management reached US$63.9 billion during the second quarter, up 70% YoY. This shows how much larger the business has become compared with a year ago, even after the pullback in precious metals valuations late in the quarter.
Another positive factor that backs Sprott’s outlook is its critical materials strategies, which generated positive net sales last quarter. The firm continues to see long-term opportunities linked to energy security, grid reliability, and rising electricity demand.
That gives Sprott more than one potential growth driver. A continued recovery in precious metals could support assets under management and fee revenue, while continued investor demand for critical materials could add another source of growth.
After a 26% monthly rally, I would rate the Sprott stock as a cautious buy for long-term investors rather than a stock to chase aggressively. While its earnings momentum remains impressive, the recent sequential decline in its assets under management shows how quickly commodity-price swings can affect the business.
