by Aaron Levitt | April 3, 2014 10:17 am
While many investors’ focus has tilted toward natural resources like corn, copper and oil, the most important commodity still remains absent from their portfolios.
That would be good old-fashioned H2O.
Water is quickly emerging as one of the most investable natural resources on the planet. It’s a classic tale of scarce and dwindling supplies coupled with rising global demand. Despite the fact that the substance covers much of the earth’s surface, currently only about 3% of it is considered fresh. Of that small amount — thanks to pollution and our polar ice caps — less than 0.0007% is actually suitable for consumption.
Meanwhile, our rising global population is draining these meager supplies at exponentially increasing rates. Data provided from the United Nations shows that withdrawals for freshwater have tripled over the last 50 years to reach an annual rate of 16.9 trillion gallons each and every year.
That’s a sobering statistic.
But it’s also one that could lead to opportunity for investors. Betting on “Blue Gold” could be one of the best portfolio plays for the longer haul. Here are five of the best water stocks to buy today.
Spun-off from industrial giant ITT (ITT) a few years ago, Xylem (XYL) could be a great starting point for investors looking at water stocks. Aside from its cool and appropriate name, XYL provides host of equipment — pumps, controllers and filtration devices — for wastewater treatment plants across the globe.
That’s a great business to be in.
As we use more water, we make more “dirty” water. And given our finite supply, cleaning it is a major issue. In fact, analysts peg that 95% of the raw sewage created in the world flows back in our lakes, rivers and aquifers due to the lack of proper cleaning equipment.
As governments around the world realize that they need to keep their water supplies clean, it’s been a boon to XYL’s bottom line. For its recently reported quarter, Xylem reported a 7% boost in revenues as demand for its water infrastructure and applied water products surged. That revenue boost also managed to beat analysts’ prediction by a hefty 5%.
It also helped XYL deliver a nice 10% increase to its dividend.
And with more demand for its products coming, XYL could be one of the best water stocks to buy today.
As we’ve seen with fracking in the energy sector, sometimes the simplest ingredients can be the best investments. When it comes to water, we’re talking about carbon.
Calgon Carbon Corporation (CCC) is one of the largest manufacturers of activated carbon and filtration systems in the world, with activated carbon capacity of around 75,000 tons per year. That’s a good position to be in, as carbon filters are some of the most effective methods at removing chlorine, sediment and other volatile organic compounds from wastewater. They are also one of the cheapest methods for utilities to implement.
While CCC does sell its products across the globe to various utilities, its strongest position is that in emerging Asia. The company founded an Asian office back in 1997 and hasn’t looked back. Calgon continues to be the No. 1 supplier of carbon to the region — including in China. That’s critical a win for CCC as nearly 80% of China’s rivers and lakes are too polluted for even fish to survive.
It’s also a major win for investors.
CCC managed to report a huge 21% increase in fourth-quarter profits. And win those kinds of gains, it’s no surprise that shares of this wining water stock are up over 28% this year.
One of the biggest issues for water here in the U.S. occurs during transportation. Analysts estimate that roughly one-third of all water transported in the nation leaks out through our aging pipe network and is wasted. There are currently areas and cities here that are still using clay pipes laid over 100 years ago.
The Environmental Protection Agency (EPA) estimates that the United States will need to spend a staggering $500 billion over the next 20 years to replace and upgrade all of this aging water infrastructure.
Enter Northwest Pipe (NWPX).
NWPX is the leading supplier of high-pressure steel pipe used in wastewater, hydroelectric power and potable drinking water applications. While Northwest’s steel pipes are more expensive to install and use than similar concrete ones, water authorities in dryer climates prefer them as they have zero evaporation rises.
With recent drought conditions in places like California and Arizona prompting officials to begin upgrading their water infrastructure, NWPX should get the nod to begin supplying these projects.
As we continue to use more water, prices for the critical commodity will rise – even if those prices are capped by regulators. That will be a big win for the various water utilities in our nations. And when it comes to water utilities, Aqua America (WTR) is the clear winner.
WTR’s strategy over the past decade or so has been to buy up smaller and local municipal water authorizes. Strapped for cash, these smaller and town/city-based utilities simply don’t have the kind of money needed to improve their water infrastructure. Given its size, Aqua America is able to swoop in and save the local authority, while gaining control of its assets.
That strategy has been pretty successful over the years and WTR now has about 3 million customers across 13 different states.
And as a utility, WTR churns out steady cash flows and dividends. While not as high-yielding as an electric utility – due to the rate cap on water – WTR does pay out a nice 2.5% dividend, better than many of its water stocks rivals.
And WTR has managed to grow that yield by about 8% over the last five years.
Given just how many different water stocks there are, investors may be better suited in a broad portfolio. With nearly $1 billion in assets, the PowerShares Water Resources (PHO) is the largest exchange-traded fund (ETF) that covers the sector.
PHO tracks the Nasdaq OMX U.S. Water Index, which focuses on companies that create products designed to conserve and purify water for homes, businesses and industries. Investors are treated to a who’s-who of 29 different water firms — including all the picks on this list. Given that breadth of holdings, PHO makes an ideal play on the water stocks theme.
Performance of the ETF has also been good, averaging about 10.32% annually since PHO’s inception in 2005. That’s performance has managed to beat the S&P 500 by 3% during that time. Helping that performance is the fund’s relatively low expense ratio of 0.60%, or $60 per $10,000 in invested.
All in all, for those investors looking to buy a basket of water stocks, PHO’s a great option.
At the time of publication, Levitt had no positions in the stocks mentioned.
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