Vidler Water Research (VWTR)

Here’s some of the latest news and information related to the ongoing rise in shares of Vidler Water (VWTR).

The hidden value has been known for awhile, but the stock has only just started to respond.

The following chart shows how bad the drought is impacting the southwest. Last year, the water level at Lake Mead hit a multi-year low of 1,068… but 2022 is proving far worse. Lake Mead opened the year 15 feet lower than it typically does. As if that’s not bad enough, its water level started collapsing much earlier this year versus historical norms.

FYI, if the level drops 16 more feet, the state will move to Level 2 of their Water Shortage Contingency Plans, just as California recently did. Such a move will further up the ante on the value of water rights. In fact, governments are already naming Vidler Water by name in their long-term water availability plans.

Source: http://mead.uslakes.info/level.asp

The company has been selling off water rights with ever-higher profits. 2020 and 2021 showed gross profits of 80%, indicating a 5x profit versus the price they paid for the rights. This has been an ongoing trend. In 2016, gross margins were just 48.5%, indicating a nice 2x return on their investments, but far below the 51.7%, 63.4%, and 71.1% reaped in 2017, 2018, and 2019 respectively.

Best of all, the company pays little-to-no income tax due to significant past operating losses (a hidden asset which is benefiting new investors). This enables the company to do massive buybacks (they’ve already bought back 20% of the company) and/or special dividends (like the $5 per share they issued near the end of 2017).

Since then, management has opted for buybacks… and with good reason. If the increasing gross margins are any indication, the value of their rights may have increased by about 2.5x over the past 4 years (equivalent to 25% per year). Yet the stock has only recently gotten back to the levels it hit in 2017.

By my calculations, a triangulation of this data yields a fair value of around $33 per share for VWTR (33% higher than the fair value indicated on my chart). That’s not much of surprise, since the value of water rights have increased substantially since the release of a mid-2021 report that declared VWTR’s value to be $25+. I calculate that an updated report would re-value VWTR about 25% higher, or $31+ per share (in the same ballpark as the aforementioned $33).

With the recent addition of $19M to the balance sheet, I believe that the buybacks have accelerated, helping the stock START to move toward the fair value figures cited above. In turn, this has pushed the stock into position to be added to the Russell 2000, which would REQUIRE institutions to purchase over $20M worth of VWTR shares, by my estimate.

Last but not least, there is a subset of investors (of which I am a part) who like to buy stock in companies that are poised to be admitted into the Russell 2000. So, we now have management, institutions, and investors like me buying/HODLing the shares.

Ultimately, all this buying should intuitively (though doesn’t guarantee) erase the massive discount on VWTR shares, pushing the stock toward its $25-33 fair value. Accordingly, my green risk/reward line currently sits at $23.50, a fair discount to the low-end of its likely valuation range.

At that point, we’ll probably be able to find better bargains in the market… but until then, this remains one of the most compelling opportunities in an otherwise risky / turbulent market.

Getting re-added to the Russell 2000 will force the purchase of $20M worth of shares

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Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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