Five Water Stocks That Hedge Funds Like

Given that water demand is somewhat inelastic and relatively insensitive to economic conditions, it’s not surprising that many smart money holders would own shares of water-related companies for their stability (and dividend yield).

On the account of that stability, we at Insider Monkey have put together a list of some of the most popular water-related stocks among the investors we track. In this article, let’s take a closer look at American Water Works Company Inc (NYSE:AWK), SJW Corp. (NYSE:SJW), Aqua America Inc (NYSE:WTR), Middlesex Water Company (NASDAQ:MSEX), and American States Water Co (NYSE:AWR).

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

#5 American States Water Co (NYSE:AWR)

– Number of Hedge Fund Holders (as of June 30): 8
– Total Value of Hedge Fund Holdings (as of June 30): $45.94 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 2.90%

Although its annual dividend of $0.90 per share (2.32% yield at current prices) isn’t the highest payout in the industry, American States Water Co (NYSE:AWR)’s dividend is certainly among the safest. Due to the stable cash flow afforded through providing water to over 260,000 Californians, American States Water has paid a dividend every year since 1931 (and its dividend has grown every year for 61 straight years), placing the stock in very exclusive company. The company’s dividend has also increased in recent years, averaging a dividend growth CAGR of 11% since 2010. One reason for the growth is that American States Water has actively expanded by providing water services for ten military bases in seven states. The company is also actively bidding for more contracts with other bases. Billionaire Jim Simons’ Renaissance Technologies trimmed its stake in American States Water by 12% in the second quarter to 811,100 shares.

#4 Middlesex Water Company (NASDAQ:MSEX)

– Number of Hedge Fund Holders (as of June 30): 9
– Total Value of Hedge Fund Holdings (as of June 30): $34.1 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 4.80%

The smart money became more bullish on Middlesex Water Company (NASDAQ:MSEX) in the second quarter. Of the around 750 funds that we track, nine funds owned $34.1 million worth of Middlesex Water Company (NASDAQ:MSEX)’s stock, which accounted for 4.80% of the float on June 30, versus eight funds and $17.44 million, respectively, a quarter earlier. One reason for the enthusiasm is Middlesex’s quarterly dividend of $0.20 per share, which translates into a 2.4% yield. Although that doesn’t sound like much, the yield is still 50% higher than the 10-year Treasury yield of 1.675%.

#3 Aqua America Inc (NYSE:WTR)

– Number of Hedge Fund Holders (as of June 30): 10
– Total Value of Hedge Fund Holdings (as of June 30): $118.52 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 1.90%

Aqua America reported in-line earnings of $0.33 per share for its second quarter, while revenue for the period was $203.9 million, missing the consensus estimate by $5.71 million. Despite the revenue miss, Aqua America raised the quarterly dividend by 7.5% to $0.1913 per share. The management also continues to expect EPS of $1.30 to $1.35 and total customer base growth of 1.5% to 2% for the full 2016. The smart money mostly maintained their holdings in the stock. Ten funds from our database were long Aqua America Inc (NYSE:WTR) as of the most recent 13-F reporting period, unchanged from that of the previous quarter.

#2 SJW Corp. (NYSE:SJW)

– Number of Hedge Fund Holders (as of June 30): 12
– Total Value of Hedge Fund Holdings (as of June 30): $47.62 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 5.90%

SJW Corp has had a year to remember. Shares of the water utility company are up an astounding 45% year-to-date, as snap up shares for the company’s $0.81 per share annual dividend, which translates into a yield of 1.91%. Investors have also been buying the stock due to the company’s better-than-expected earnings for the second quarter (reported EPS of $0.82 versus estimates of $0.41). Part of the reason for the beat was the management recognizing $8.7 million in true-up revenue as a part of the decision on the company’s 2015 California General Rate Case application. The number of investors tracked by us with holdings in SJW Corp. (NYSE:SJW) inched up by quarter-over-quarter to 12 at the end of June.

#1 American Water Works Company Inc (NYSE:AWK)

– Number of Hedge Fund Holders (as of June 30): 21
– Total Value of Hedge Fund Holdings (as of June 30): $352.59 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 2.30%

With 21 funds holding shares at the end of June, American Water Works Company Inc (NYSE:AWK) is the smart money’s favorite water-related stock on our list. Similar to the other companies covered in this article, American Water Works’ earnings are rather stable. In its second-quarter report, American Water Works Company reaffirmed the 2016 EPS of $2.75 to $2.85 that they had issued in the previous quarter. However, unlike some of the other stocks on our list, American Water has strong earnings growth ahead. The management has said the company is on track to meet its long term goal of increasing earnings at 7% to 10% CAGR from 2016 to 2020.

Disclosure: none