Is WisdomTree Investments Inc. Finally Poised for a Turnaround?

Source: WisdomTree.

Finding smart investments is one of the hardest tasks an investor faces. Sometimes, it pays to invest in the companies that make it their job to provide investment options to millions of investors across the world. WisdomTree Investments (WT -1.34%) is just one of the many companies wrangling for supremacy in the exchange-traded fund space, and it has made an impression on the industry with its distinctive fund offerings. Yet, even though revenue has continued to climb, WisdomTree hasn't done a good job lately of translating its top-line growth into higher profit.

With WisdomTree reporting its third-quarter results Friday morning, investors want to see some signs that the ETF provider is looking to reverse that trend, and take full advantage of opportunities in the industry. Yet, other major players, including industry leader BlackRock (BLK -0.50%) and Vanguard, are much larger, and WisdomTree faces an uphill battle. Let's take an early look at what's been happening with WisdomTree during the past quarter, and what we're likely to see in its report.

Stats on WisdomTree Investments

Source: Yahoo! Finance.

How can WisdomTree get back in the game?
Investors have remained nervous about WisdomTree earnings prospects recently, pulling back on their full-year 2014 earnings projections by about 10%, and also reducing their expectations for 2015. The stock has shown some signs of life, though, rising 6% since late July.

WisdomTree's second-quarter results back in August showed both the company's success, and some of its struggles. The company set a new record for U.S. ETF assets under management, with its $35.5 billion marking 22.5% growth from year-ago levels. That sent total revenue up more than 18%, given the company's average advisory fee of more than half a percent. A big income-tax expense item cast a shadow over WisdomTree's GAAP earnings results, which reflected a drop of 20% from the previous year's third quarter; but pre-tax income soared 64%, as better operating margins contributed to improving financials.

WisdomTree made a smart move during the quarter, entering into an agreement with Charles Schwab (SCHW -0.05%) to make six of its ETFs available on Schwab's OneSource commission-free ETF platform. The move will make the ETFs more attractive to the millions of customers that Schwab has. Even though the move won't necessarily result in an immediate flood of assets coming into the funds, WisdomTree hopes that the long-term impact will be to boost the popularity of its dividend-growth oriented ETFs, as well as a couple of niche offerings in the real estate and managed futures areas.

Dividend ETFs are an important source of revenue for WisdomTree. Source: WisdomTree.

But the big question investors face is whether WisdomTree will become a takeover candidate. Earlier this month, Janus Capital (JNS) bought VelocityShares for $30 million, and other reports suggest that some other players in the ETF space might be considering similar deals. With some traditional mutual fund companies finding it difficult to build up their own ETF offerings internally, the easier path would be to buy out a company like WisdomTree, and its substantial losses so far this year make WisdomTree a much cheaper target than it was as recently as late 2013.

In the WisdomTree earnings report, smart investors need to look beyond headline numbers to see how the company is doing at gathering assets under management, not just for its most popular funds, but also for its more marginal offerings. The name of the game in the ETF space is having enough liquidity to spur investor interest; therefore, WisdomTree needs to make more of its funds household names among rank-and-file investors in order to keep its doors open and boost its overall profitability.