Multi-Million Dollar Hedge Fund Focusing on Water, Utilities: American Water Works Company Inc (AWK), SJW Corp. (SJW)

Although the average investor often turns a blind eye to hedge fund activity, paying attention to the best managers can be both wise and profitable. Here at Insider Monkey, we track the U.S.’s top 450 funds, and our research shows that, historically, their consensus small-cap picks have beaten the market handily (see just how much here).

One such fund is manager John I. Dickerson’s Summit Global Management, which saw his 13F-based portfolio appreciate by 1.04% for the quarter.

Let’s have a look at Dickerson’s top picks.

The mouthful Companhia de Saneamento Basico (ADR) (NYSE:SBS) is Dickerson’s largest holding. The manager’s favorite comprises 15.49% of his fund’s portfolio. The relatively stable stock–beta of 1.45–is trading above the utility sector’s average P/E by nearly twofold, at 13.13x. With earnings per share of 3.65, and steady EPS growth from 2008’s total of 28 cents indicates the stock is an attractive prospect. Basico has a return on equity of 15.08%, significantly outpacing the industry average of 5.57%, and that figure has been above the 10% mark since 2009. Furthermore, a 27% appreciation in the past twelve months has made bulls like Dickerson very happy.

Majority-owned by the state, the company provides sewage services to roughly half of the municipalities in developing Sao Paulo, in addition to wholesaling water. Although Brazilian GDP is relatively stagnant at the moment, the world’s sixth-largest economy may be heading into a period of recovery. In such an environment, and in a city with an ever-increasing population, it’s difficult not to join in this hedgie’s optimism about the long-term viability of Basico.

American Water Works Co., Inc. (NYSE:AWK)

The second largest equity in Dickerson’s portfolio, American Water Works Company Inc (NYSE:AWK) occupies 11.47% of Summit Global Management’s holdings. Recently missing analyst estimates, American Water Works Company Inc (NYSE:AWK)’s fourth quarter profit fell 14.5% to $55.4 million, or 31 cents per share, from $64.8 million, or 37 cents per share, in the same quarter a year prior. However, this should be little cause for concern, as the decline is attributed to “Superstorm” Sandy.

The water utility company has a respectable dividend yield of 2.50%, and also outpaces industry norms in both ROI and ROE, with figures of 2.77% (0.54% above average) and 8.62% (2.69% above average), respectively.

Making up 6.79% of Summit Global Management’s portfolio, SJW Corp. (NYSE:SJW) showcases Dickerson’s affinity for water, once again.

While earnings per share have been constant since 2010 for the water-centric holding company, SJW is trading at a moderately attractive 23.47 P/E, and a very enticing 8.29% ROE–well above the industry average by more than two percentage points.

The company, whose holdings include San Jose Water Company and the Texas Water Alliance, has seen steady upward movement in its stock price. Indeed, over the past year the stock is up 21.41%, and SJW recently reported an operating revenue increase of $22.6 million for 2012–a boost of 9.5% from the previous year. The stock’s 2.63% dividend yield isn’t mind-blowing, but its 44-year streak of dividend payments is an encouraging history for the long-term income investor.

Pentair, Ltd. (NYSE:PNR) and Itron, Inc. (NASDAQ:ITRI) are the fourth and fifth largest holdings in Summit Global’s equity portfolio, worth 6.18% and 6.12% of the fund’s total 13F capital, respectively. Pentair, the industrial manufacturer with a focus on water and fluid solutions, saw aggregate hedge fund interest increase by 8% in the fourth quarter, with prominent names like Cliff Asness and George Soros (see Soros’s full equity portfolio here) establishing new positions. The stock trades at a fairly attractive earnings multiple of 13x, and sports a dividend yield (1.8%) that’s more generous than 80% of the entire industrial goods sector.

Meanwhile, the natural gas meter technology company, Itron, has quality ROI figures–presently at 7.01% versus peer averages near 4%–and a return on equity above 11% indicates that its efficiency is over twice that of industry norms. Wall Street’s average price target on Itron indicates that an upside of 7-8% is expected from current levels.

Each of these stocks represents a promising play moving forward, and it’s not difficult to see that the predominant macro-level theme in Dickerson’s equity portfolio–water–sheds light on a space that retail investors should take a look at as well.

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