Holly Singer, HS Marketing, & Hedge Connection’s Director of Content
On December 4th, Hedge Connection hosted its End of Year Recap and Holiday Celebration. The event opened with Mithra Warrier of TD Securities moderating a panel of hedge fund managers in a discussion of their Best Ideas for 2020. Each of the managers on the panel will have their best idea featured here on The Edge. Below we have Christopher Antonio, CIO, Dipsea Capital LLC breakdown AquaVenture Holdings, a developer and provider of sustainable water.
Water-as-a-Service (WAAS): AquaVenture Holdings Ltd
When asked to offer our best idea for 2020 and given our focus on trading derivatives with duration of less than a week, we initially thought we’d be better suited to give, “Our Best Idea For the First week of 2020!”
Therefore, selecting a longer term, fundamentally based investment does not reflect our core competency. Yet permit me to offer why our “non-cognitively biased perspective” may in fact add value to the quest for a good investment in 2020.
1. A University of California study found strong evidence that investors have behavioral biases that often affect investing decisions more than empirical company data. Some of those cognitive biases are:
a. Overconfidence:
i. Cannot fall victim to this bias. I don’t claim to know anything about long term value investing.
b. Regret Aversion/Confirmation Bias:
i. No emotion tied to the company we’ve chosen; Do not own the name, have never traded or followed the company.
c. Sunk Cost Fallacy:
i. Have not devoted hours to the study of their business. Therefore not inclined to
remain committed to the idea if I uncovered data unsupportive of investment
during my research.
d. Fear of Missing Out (“FOMO”):
i. This isn’t a high beta name, and it’s a long term play. No emotional attachment to get involved.
With certain cognitive biases minimized, our best idea is the business of Water-as-a-Service (WAAS).
- AquaVenture Holdings Limited
- The company offers customers a reliable and cost-effective source of clean drinking water, process water, wastewater treatment and water reuse solutions, primarily under long-term contracts that minimize capital investment by the customer.
- Business model facilitates long-term customer relationships, (typically multi- year contracts), recurring revenue, predictable cash flow.
- Company headquartered in the British Virgin Islands.
- Principal Executive Offices, Tampa Florida
Management:
a. Chairman: Alumni of M.I.T. and Harvard Business School
- Other Key Executives: Harvard and University of Chicago Business Schools
- Multiple years of experience in the water industry.
4. Company began trading on the NYSE in October 2016. Currently trading at approximately the same price level as 3 years ago.
5. Financials:
- Market Cap approximately $700 million
- Sales: Annual Growth past 5 years >39% per year.
- Earnings: Estimated to lose $.56/share next year, 31 million shares outstanding.
- Debt to Equity: <.8
- Cash flow positive: 133% growth in operational cash flow over the past 3 years.
6. Insiders:
a. Only 1 insider has sold stock in the past year. Top management owns over 8% of shares outstanding.
7. Dipsea IP
a. Pattern Recognition/Momentum/Relative Strength: Positive on multiple timeframes.
Conclusion:
- Management team Strong: Incentivized, experienced and smart. Don’t believe this level of talent would coalesce unless the management team felt it yielded meaningful upside potential.
- Growing Market Segment: Intrepid business model implementation. Water-as-a-Service
- Positive Financial Trends: Consistent growth in sales and free cash flow.
- Technically Sound: Market price of company shows accumulation and positive trend from a monthly and weekly perspective.
- Safe Haven: Sound growth idea in a broad market environment which appears expensive by historical standards.
Investment Strategy of Fund: Generate consistent, uncorrelated returns to the broad market, investing in short duration (weekly options) on equity indexes and U.S. stocks.
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