Water as an Asset Class: PICO Holdings

As a follow up to the October 2008 newsletter where we discussed the importance of asset allocation and the December 2008 newsletter with its focus on timber as an asset class, I figured it would be a good idea to revisit another asset class that we have briefly discussed in the past. When discussing the water ETF Powershares Water Resources (PHO) in the November 2007 edition of SINLetter, I wrote:

Clean water for domestic consumption as well as industrial use is not only going to be an important trend of this decade but explosive population growth combined with higher standards of living could make it the biggest trend of this century.

PHO has performed inline with the rest of the market dropping 43% since November 2007 but has done better than other commodities like oil and steel that have lost more than 65% of their value over the same time period. While PHO provides a lot of exposure to water related infrastructure companies (79% of holdings as of 1/30/2009) and utilities (nearly 9% of holdings), I noticed that companies like PICO Holdings (PICO) and J.G. Boswell (BWEL.PK) that own a lot of land with water rights are missing.

Since J.G. Boswell is a thinly traded pink sheet stock with no financial statements available, I am instead going to explore PICO as a potential investment opportunity. PICO, through its subsidiary Nevada Land and Resource Company, is one of the largest private landowners in the state of Nevada. The company through its subsidiary Vidler Water Company develops, stores and supplies water in Nevada, Arizona, Idaho and Colorado. As you can see from the chart below, water resources and storage operations account for nearly 39% of net book value as of June 30, 2008. As of the third quarter this mix has shifted with water resources now accounting for 41.4% of book value. The operative words here are "net book value" and not revenue or earnings. The company's earnings are quite volatile and its primary focus is improving book value per share, which it has done consistently at an annual rate of 18% since 1994.

Due to current market conditions, shareholder equity fell to $501.3 million as of September 30, 2008 from $518.6 million in the previous quarter. This drop was primarily on account of a -17.2% drop in the investment portfolio of their investment operations in the first nine months of 2008. PICO's stock sold off with the rest of the market, pushing the stock from a high of $48.22 on September 2, 2008 to its current price of $25.42.

When compared to other land holding companies, PICO's Enterprise Value/Acre is one of the lowest at just $824 but you also have to keep in mind that the quality of its land in Nevada contributes to this low value. The company currently trades below book value and in recent weeks insiders have started buying. With its focus on book value, the company has a very strong balance sheet with nearly $140 million in cash and just $28 million in long term debt. Given the long-term potential of its sector, track record of their management and current valuation, I believe PICO represents an attractive investment even at this juncture. I am going to add a small position to the model portfolio by purchasing 150 shares of PICO. I plan on initiating a position in my personal portfolio as well.

Comments

[footchester:]

PICO was one of those stocks that I discovered after screening stocks using the screen utilities from several different sources (Yahoo, Fidelity, etc.) PICO kept showing up as a great long term investment, except for one problem, I had missed the boat. It was trading in the 40s and showed no sign of heading back down. I added PICO to that list of great stocks that I had discovered too late.

Even a nasty recession (depression?) has its silver lining; and the opportunity to grab PICO for $21/sh was my pick for making the best of a bad situation. I truly believe that the coming "water crisis" will make recent concerns over fossil fuels seem almost laughable. Water may be the most abundant resource on earth, but it is also the most in demand. And unlike, say gold, a million gallongs of water can be ruined by one clown with a bottle of concentrated pesticide or other bad stuff.

I can't guarantee that PICO is the correct way to play the coming water 'crisis' but buying a company that actually owns water, and land with water rights seems like a potentially great investment. Time will tell.

Feb 09 05:26 PM

[Asif Suria:]

Footchester, I cannot agree more. I came across PICO while researching the water ETF PHO a while ago and kept it on one of watch lists until the stock had pulled back from its highs along with the rest of the market. Recessions do provide opportunities for the patient investor.

However PICO does face short-term risks as I believe further losses in the investment portfolio from the insurance side of their business will bring down book value.

Feb 09 07:30 PM

[granger:]

Thanks for the idea. I will be looking for a pullback to add some, as I have allocated 5-7% of my portfolio to water holdings.

Any thoughts on DHR, FELE or HOO. I definably like PICO as the purest play.

Feb 12 04:12 AM

[Great Dane:]

I added PICO to my portfolio on October 24 2008, and it is one of my shares which has held up relatively well in this mad market, losing about 20% in Euro value and 23% in dollar value.

The shares are now trading at 79% of its equity value of which nearly 17% is in cash and liquid investment (20% if expected tax refund materialises).

I like the conservative approach of the company, the fact that they have debt/equity ratio of nearly zero and plenty of cash - and of course Water.

I will be adding additional PICO shares to my portfolio today.

Mar 06 08:05 AM