Palm Valley Capital Management, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 1.16% was recorded by the fund for the second quarter of 2021, trailing the S&P SmallCap 600 and Morningstar Small Cap Index that delivered a 4.50%, and 4.23% returns respectively for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Palm Valley Capital Management, the fund mentioned Vidler Water Resources, Inc. (NASDAQ: VWTR), and discussed its stance on the firm. Vidler Water Resources, Inc. is a Carson City, Nevada-based water supply company, that currently has a $250.4 million market capitalization. VWTR delivered a 44.06% return since the beginning of the year, extending its 12-month revenues to 73.81%. The stock closed at $13.47 per share on July 09, 2021.
Here is what Palm Valley Capital Management has to say about Vidler Water Resources, Inc. in its Q2 2021 investor letter:
“During the quarter we purchased Vidler Water Resources (ticker: VWTR). Vidler Water Resources controls water rights in western states. Water rights are the legal authority to use water from a stream, river, or lake. The American West is experiencing a severe drought, and water is increasingly scarce. Vidler’s primary assets are water rights needed for development north of Reno, Nevada and water stored in Arizona that can be used to mitigate shortfalls from the drought. The company sells its water rights to private companies, developers, and municipalities. Vidler has an extremely clean and simple balance sheet with hardly any liabilities. We valued the business based on a price per “acre-foot” of water rights and storage credits using comparable transactions and the company’s own sales history.
The opportunity exists because Vidler used to be part of a larger firm called PICO Holdings that was involved in various activities and failed to create any shareholder value over two decades. Under new leadership, the business was streamlined down to the water rights business of Vidler. The timeline for sales of water assets has been routinely pushed back, which is due to permitting delays for new Reno housing developments and the patchwork of regulations associated with claiming and selling water rights. We believe the firm is now closing in on monetizing its major assets. Vidler’s plan is to return capital to shareholders, and management is incentivized to make it happen soon.
The stock of Vidler Water, our recent purchase, began rising as soon as we attempted to build a position. The shares’ behavior was odd given Vidler’s telegraphed ejection from the Russell 2000 Index due to a low market capitalization. We assume investor fears over forced passive selling were addressed earlier in the quarter, leading to a May and June rally in the stock, which had previously significant underperformed the small cap space. “
Based on our calculations, Vidler Water Resources, Inc. (NASDAQ: VWTR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Vidler Water Resources, Inc. was in 9 hedge fund portfolios at the end of the first quarter of 2021, compared to 8 funds in the fourth quarter of 2020. VWTR delivered a 47.70% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.