Maran Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund returned approximately 13.6% net in the third quarter and approximately -1.3% for year-to-date. Over the past three years, Maran Partners Fund is up 38.5% net while the Russell 2000 total return index is up just 5.4% during the same period. You should check out Maran Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Maran Capital highlighted a few stocks and Pure Cycle Corp (NASDAQ:PCYO) is one of them. Pure Cycle Corp (NASDAQ:PCYO) is a water services company. Year-to-date, Pure Cycle Corp (NASDAQ:PCYO) stock lost 25.7% and on November 4th it had a closing price of $9.49. Here is what Maran Capital said:
“Pure Cycle (PCYO)
As a Colorado native, I’m certainly biased about the virtues of my home state. But the data seem to indicate that my bias is not completely misplaced. US News and World Report’s list of top places to live in the US in 2020-213 begins with:
1. Boulder, CO
2. Denver, CO
3. Austin, TX
4. Colorado Springs, CO
5. Fort Collins, CO
According to the Denver Metro Association of Realtors,4 September was the “toughest month to buy a house in Denver Metro’s history,” with just 5,301 total active listings, and 3,041 detached single family listings (almost half of the previous low). The median house stayed on the MLS for just six days. Inventory – especially at the entry level – is scarce, mortgage rates are low, and Denver’s population is growing.
Given this incredibly bullish backdrop, could any stock exposed to this theme still have a reasonable valuation? Could a pure-play Denver real estate and water company be trading at an extreme low valuation below where it closed on March 23rd, the day the S&P 500 reached its Covid-panic lows, and down over 30% year-to-date?
Incredibly, the answer is yes.
Pure Cycle is a Denver area land developer and water utility. The company owns a nearly 5,000-singlefamily-lot-equivalent-development 25 minutes from downtown Denver that is delivering lots to a number of national homebuilders, as well as ~30k acre feet of water supplies and significant additional water infrastructure in the area. Its balance sheet is pristine, with a large net cash position and de minimis total liabilities.
I believe PCYO is a “fifty cent dollar,” with approximately $10/sh of value in land and lots, and approximately $10/sh of value in water rights and infrastructure, against the current sub-$9/sh stock price. Importantly, the value of the “dollar” is growing as the company is commencing phase 2 of its real estate development and as more people move to the Denver area, proving out the scarcity value of entrylevel homes and water rights in the region.
There is an element of special situation here. A former 25%-owner of PCYO has been exiting its position for the last year, which I believe has been weighing on shares. Once this seller is cleaned up, I believe the stock has 50% upside in the near term, and 100%+ upside over the next few years.
We have owned a number of real estate-related companies over the years (see our Q1 2016 letter, for example). What has tended to work for us are situations with the following attributes:
1) a large discount to liquidation value (preferably a “fifty cent dollar”);
2) fair value (the “dollar”) is growing; and
3) a catalyst to unlock value.
I believe Purce Cycle has all of these attributes.”
Pixabay/Public Domain
In Q1 2020, the number of bullish hedge fund positions on Pure Cycle Corp (NASDAQ:PCYO) stock increased by about 40% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in PCYO’s growth potential. Our calculations showed that Pure Cycle Corp (NASDAQ:PCYO) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:
Disclosure: None. This article is originally published at Insider Monkey.
