When Crisis Meets Innovation

By TradeSmith Editorial Staff

Listen to this post

I’ve compared the COVID-19 crisis to the attack on Pearl Harbor in recent days. Following World War II, the U.S. experienced dramatic levels of innovation and society-shifting trends that forged the strongest middle class and military forces ever.

The post-COVID-19 economy will continue to deliver innovation in global logistics, health care, work-from-home technologies, cybersecurity, and much more.

But there is another crisis happening right here in the United States that continues to slide under the radar. It’s unclear what technological changes will occur in the near term, but it’s setting up to be another type of “Pearl Harbor” moment.

I’m talking about the water crisis happening along the Colorado River. Let me explain what is happening and how you can invest in real change to address this crisis.

Water Crisis Intensifies

The relationship between Americans and water is about to change significantly. For years, we have relied on the majority of available clean water for drinking and personal hygiene — AND inexpensive hydroelectricity.

But last week, the U.S. government officially declared a shortage of water in the Colorado River. This river and its tributaries provide water to more than 40 million people across multiple states. It is also a critical source of fuel for electricity companies and farms across the Southwest.

This shortage isn’t a surprise. For years, scientists have studied the retreating levels of snow falling into the Rocky Mountains and how this reduction in resulting runoff affected the nation’s largest reservoir, Lake Mead, down the road from Las Vegas.

Decreased snow and higher water demand has created a supply/demand imbalance. But add on drier conditions and you have more evaporation in the region that is sucking up moisture in the soil. Lake Mead alone has dropped by 130 feet in depth since 2000.

Take a look at the first picture. This is a satellite picture of Lake Mead in 2000.

And this is a NASA image from earlier this year.

You can notice an immediate difference and a real crisis in real time.

The federal government is now implementing changes on how water is managed. States like Arizona and Nevada, combined with Mexico, are about to see steep cuts to their access to water from the Colorado River. Nevada will start to reduce its annual use by 7% — or 21,000 acre-feet — in 2022 under federal guidelines. This is equivalent to about 6.8 billion gallons.

Arizona is cutting about 18% of its annual allotment to the river next year. And the nation of Mexico will need to slash draws from the river by about 5%.

It’s especially bad news for Las Vegas and its population of more than 634,000. The city pulls 90% of its water from the river. Tucson — population 541,000 — draws 82% of its water supply from the river.

And San Diego and its population of 1.41 million?

The city taps 66% of its water from the Colorado River as well. It’s also a key source for Los Angeles, Denver, and Phoenix.

Buying Into Water

Over the last two decades, some of Wall Street’s sharpest minds have moved to purchase water stocks and supplies to capture gains from this crisis. Famed Texas oilman T. Boone Pickens famously invested heavily in water rights from the Ogallala Aquifer in the center of the United States.

“The Big Short” investor Michael Burry made $800 million shorting the subprime crisis. He quickly turned around and started to focus on water companies.

Banks like JPMorgan Chase, Goldman Sachs, UBS, Citigroup, Credit Suisse, and Deutsche Bank have all pressed into land acreage and water rights.

Clearly, Wall Street knows that the crisis creates opportunity.

And let’s be honest. This is a trillion-dollar opportunity that is right in front of you. I know that people like to speculate more around commodities like oil, gold, or data. But water is the most important commodity in the world. Whether it’s for food, power, bathing, drinking… it is the essence of life.

So, let’s talk about a company that will continue to profit from this.

Focus on Vidler Water Resources (VWTR)

In May, I talked about three different companies that should generate interest for investors in the water space. We like companies that bottle water, process water, and own water.

This last category is best represented by Vidler Water Resources.

The company used to operate under the name PICO Holdings, and its owners fancied themselves a sort of Warren Buffett conglomerate. The company owned insurance companies, real estate, land management firms, a lending arm, water resources, and several European companies.

The only division that really worked out was the water company. And today, that legacy lives on after the company divested pretty much everything else.

Vidler owns water rights, land, and infrastructure along the Colorado Basin.

Remember how I said that Las Vegas and Phoenix were facing shortages?

Well, Vidler owns assets in or near Reno, Nevada; Phoenix; and Las Vegas.

It sells these water rights to local towns and municipalities. In fact, it just sold 37 acre-feet of water credits to a small region in Reno for residential and commercial developers. It says that it was able to increase the price of its credits in July by 5% year-over-year. The company charges $43,575 per acre-foot for residential use and $37,800 per acre-foot for commercial purposes.

Given the supply and demand imbalance, is there any reason to believe that the value of these assets would decrease?

Since we discussed the stock back in May, shares have surged from less than $10 to more than $14. But there is likely more room to run in the future.

Vidler is still in the TradeSmith Finance Green Zone and carries an uptrend in momentum. We’ve also seen hedge funds like Bandera Partners and Royce & Associates take large positions in the company over the past year.

It remains a buy, and we see a strong ongoing opportunity in this space.