Small Cap Water Play Of Top Value Manager With 100% Upside Potential

Water scarcity is one of the biggest issues the world faces today and some analysts believe over the next few decades, water could become the globe’s most valuable commodity.

Indeed, according to the 2018 United Nations World Water Development report, almost 6 billion people are likely to live in areas that suffer water shortages for at least one month a year by 2050, up from 3.6 billion today.

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Q1 hedge fund letters, conference, scoops etc

With the world’s supply of fresh water limited, it is no surprise investors are rushing to put their money to work in the sector. But, opportunities for investment are relatively scarce. There are few listed companies that own water rights directly and most companies with exposure to the sector are trading at premium valuations.

However, emerging hedge fund manager Gate City Capital believes it has found an undervalued play on water that could offer an upside of 100% from current levels.

Undervalued water rights play

The firm profiled its idea in the Q1 2019 issue of Hidden Value Stocks (ValueWalks’ quarterly publication which profiles two under the radar hedge funds and four value stocks (with little coverage) in each issue).

Here’s part of the interview. The full investment idea is only available for subscribers.

"XXX owns significant amounts of water rights and credits across the American southwest. In many cases, XXX invested significant capital to convert these assets for municipal or residential use and to build infrastructure to transport the water to the end user. XXX makes money by selling the company’s portfolio of water rights and credits to commercial and residential developers or be leasing its water assets to end-users.

Management has committed to monetize the company’s asset base and return proceeds to shareholders in order to appease shareholders following years of poor equity performance. Since 2017, XXX has paid a $5/share cash dividend (approximately $116 million) and repurchased over $20 million in common stock. We expect the company to continue to return significant capital to shareholders as the company monetizes additional water assets.

We have a target valuation for the company of $480 million or approximately $22.50/share. We arrive at this valuation by valuing each of the company’s individual water assets. We have visited developments...and spoken to many of the area developers to gain additional comfort with our estimates of fair value. "

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About the Author

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email - Rhagraves@valuewalk.com