This article is a part of InvestorPlace’s Best ETFs for 2018 contest. James Brumley’s pick for the contest is Powershares Water Resource Portfolio (NASDAQ:PHO).
As far as thrilling investment themes go, there’s no denying the technology sector has more than its fair share of them. Cloud computing and artificial intelligence are just a couple of the recent hot buttons from the world of technology, and many more such evolutions are sure to be on the way.
Not every worthy investment has to be centered around a new technology though. Sometimes, old — even ancient — areas can yield a surprisingly big payoff. Water is one of those areas, putting the Powershares Water Resource Portfolio ETF (NASDAQ:PHO) at the top of a short list of ways to tap into this surprisingly lucrative business.
And if you don’t think water is a big deal, (1) try living one day without it, and (2) try making some water on your own. Its true value will become crystal clear then, as will the value of the PowerShares fund.
PHO: Thirsty for Solutions
Care to guess how much water the average person living in the U.S. uses every day? Amazingly, between 80 and 100 gallons.
Problem: To say the United States (and the world, for that matter) is finding it increasingly challenging to supply potable water to its people would be a considerable understatement. It’s downright troubling, and the situation is only going to get worse in the foreseeable future. The American Water Works Association estimates the U.S. alone needs to invest $1 trillion in the nation’s water infrastructure over the next 25 years to stay out in front of demand for clean water.
Globally speaking, the picture is just as grim, if not darker.
Solutions to these problems exist, to be clear. In some cases it’s just a matter of a local utility provider ramping up its processing capacity. On other fronts, desalination is the solution … albeit an expensive one. Still in other areas, the challenge is simply gaining access to any water resource.
There’s money to be made in providing such solutions though. Enter the Powershares Water Resource Portfolio ETF, which includes names like Roper Technologies Inc (NYSE:ROP), Ecolab Inc. (NYSE:ECL), IDEX Corporation (NYSE:IEX) and American Water Works Company Inc (NYSE:AWK). The first of the three help facilitate more efficient usage and treatment of water, while the last is one of a few water utility stocks found in the fund. They all play a revenue-bearing role in meeting the growing need, and all are capable of dishing out significant growth.
Yes, even a water utility outfit like American Water Works can be a growth machine thanks to the leverage it and its peers have on local governments. Water prices, which are ultimately regulated at a local level, nationwide have gone up every year since 2010. The pace of the increase is slowing, though that’s got more to do with smarter conservation than slowing price hikes.
Of course, given that most water companies are in effect monopolies and these providers have turned the act of asking for rate hikes into an art and a science, the ever-increasing costs should come as no surprise.
More important, constantly rising prices translate into reliable cash flow — and dividends — for investors.
Bottom Line for PHO
So why now? PHO stock has been doing just fine for a long while, to be clear. It’s up 20% for the past twelve months, so it’s not as if 2018 is poised to be some sort of coming-out year for the industry. “More of the same” is in the cards, most likely.
There is something of a convergence of trends that suggest this year could be an explosive one for all the various water industries, however.
One of them is the sweeping acceptance across the nation that our lack of potable water is a problem we can no longer ignore. Water shortages in Utah, are about to get very real, real fast, forcing consumers, politicians, engineers, scientists and others into action. Such news will travel fast, and prod others into more preventive measures.
Another one of the trends coming to a head this year is political. President Trump is for spending on infrastructure, as are Democrats and most Republicans. The recent tax overhaul, however, jeopardizes much of the funding that would normally be used for water system improvements. With funds at risk, alternative and more cost-effective solutions may come to the forefront … that, or perhaps a better explanation of the true need for better-supported investments in water infrastructure.
The funding-centered infighting isn’t unique to the United States though, and clean water is just as much of a hot button in other parts of the world — just as soon as there isn’t any for some people living in the wrong place at the wrong time.
Point being, as ugly as the water problem has been allowed to become thus far, that ugliness should be reaching an apex very soon, prompting the overdue solutions offered by the companies that make up Powershares Water Resource Portfolio ETF. It’s certainly a bet worth making anyway.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.