Nomadic Value Investment Partners recently released its Q2 2020 Investor Letter, a copy of which you can download here. The investment firm supports enterprising individuals and families in achieving respectable long-term investment performance. You should check out Nomadic Value’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Nomadic Value highlighted a few stocks and Ameresco Inc. (NYSE:AMRC) is one of them. Ameresco Inc. (NYSE:AMRC) is an energy company. Year-to-date, Ameresco Inc. (NYSE:AMRC) stock gained 78.9% and on August 14th it had a closing price of $31.05. Here is what Nomadic Value said:
“In early June we made a 5% position in the energy performance contractor, Ameresco (ticker: AMRC). Energy performance contracting (aka energy services contracting, or ESCO for short) is a niche industry that has grown over the decades to provide an essential service of modernizing municipalities, K-12 schools, universities, and state and federal government buildings with energy efficiency and savings technologies. An ESCO is a designbuild general contractor but is also different from typical general contracting in that it enters into energy performance contracts (ESPCs) on the equipment it installs. These contracts are unique in that the ESCO guarantees the expected energy savings, and then finances the equipment to the government entity. The goal is for the energy savings to pay back the equipment cost, interest expenses, and the ESCO’s profit, allowing a budget neutral, off balance sheet CAPEX and longer-term cash flow savings to the government. ESCOs hold a special license to do this7 , and it acts as a sort of barrier to entry against fly-by-night competitors8 . The ESCO model has grown over the last couple of decades from a mix of market development and improvements in technology. While the ESPC award process is cyclical in nature9 , ESCOs that manage this well are here to stay and enjoy a long-term and overall growing market niche.
AMRC is one of these ESCOs. It was founded in 2000 by an ex-employee of Noresco (one of the largest ESCOs), went public in 2010, and today is one of the leading ESCOs with a project backlog of over $2Bn. The founding management team is still in place and owns over 20% of the class A shares outstanding. A long-dated and highly aligned management team (who have voting control) has been important for maintaining the company’s “energy geek” culture10 , which I believe helps the company not only underwrite contract bids better (knowing the risks and their costs), but also helps them win contracts when they aren’t the lowest bid.
We wouldn’t normally get excited about a cyclical industry with low single digit profit margins. However, AMRC has now taken their engineering abilities and pivoted the business model by focusing on commercial projects (think automotive factory or warehouse), where they do both ESPC-like arrangements as well as cash sales. This not only grows gross profit dollars with a much faster cash conversion than government work, but also gives them flexibility to invest into what I think will help double earnings over the next 5-7 years – wholly owning the solar PV projects they place on these customers’ premises.
Y’all know I’m a raging solar bull. However, I will always caveat that viewpoint with, “you got to do it right.” Right by me is owning solar directly and more specifically, developing these projects from scratch. Of course, like real estate developers, locking up the best projects is cut-throat competitive11. Cost advantages are rare across developers. But I think AMRC is now in a perfect position to develop in a competitive fashion. This comes from a mix of their engineering culture, their comprehensive energy efficiency offering which lowers allocable SG&A, and their flexibility and competency with financing. So, given the focus, competitiveness, and the industry’s long-term trends, I think there’s a strong chance AMRC can grow this portfolio at low teens rates for several years, effectively doubling today’s roughly $90 million in EBITDA to nearly $200 million. In addition, we think we’ll get more stability in earnings and overall profitability trending higher.”
In Q1 2020, the number of bullish hedge fund positions on Ameresco Inc. (NYSE:AMRC) stock increased by about 38% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Ameresco’s growth potential. Our calculations showed that Ameresco Inc. (NYSE:AMRC) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.