Long-term bets on the Powershares Water Resource Portfolio (NASDAQ:PHO) fund are finally starting to pay off. Over the course of the past twelve months, PHO stock has gained around 12%, versus a more modest 8% gain for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
The performance of the water-minded ETF is even better — relatively and on an absolute basis — when limiting the look to just the first quarter. Whereas the S&P 500 is up just a little more than 11% since the end of last year, PHO stock has gained almost 19%.
This is the kind of “aha” moment we’ve been waiting on since the beginning of 2018, when the Best ETFs Contest ultimately began.
The performance of the Powershares Water Resource Portfolio isn’t the most compelling aspect of PHO stock here, however. It’s that the fund’s constituents have been so uniformly bullish of late after a couple clunkers took a big toll on last year’s bottom line.
PHO ETF Leading the Charge
Waters was a bit of a disappointment for the better part of last year, slumping in front of a third-quarter revenue miss that ultimately prompted Goldman Sachs to downgrade WAT stock to a “sell.” The analytical firm feared more of the same kind of weakness lay ahead.
In retrospect, though, its Q3 results and the downgrade may have served as a catharsis and capitulation for Waters. Although WAT stock ultimately hit a new 52-week low in December (as most stocks did), shares have rallied more than 40% in the meantime. Fourth-quarter earnings of $2.87 per share not only topped estimates of $2.65, the company offered current-year profit guidance well in excess of expectations.
Danaher is another name that has finally come around following a lackluster 2018. The stock’s up 35% for the past twelve months, but all of that gain has been logged just since its late-December low. The stock was spurred higher by a solid Q4 print, though was acting bullish before that late-January report, and has continued to push higher in the meantime.
Click to Enlarge All of the fund’s constituents, however, have been solid performers in recent weeks, with the need for better water-management slowly but surely becoming evident in solutions-providers’ bottom lines.
Still, most investors underestimate just how big the problem of potable water — or lack thereof — really is.
A Thirst for Solutions
It’s a resource most anyone reading this likely takes for granted. Most investors only have to turn a knob at a faucet, open the refrigerator or press a button at work to have instant access to (seemingly) all the water they want.
But they may not realize how close demand is to exceeding supply.
Yes, it’s a third-world problem, but not just a third-world problem. One only has to look at the ongoing disaster in Flint, Michigan to realize just how troubled the United States’ aging infrastructure is. The lead contamination is abating, but it took too long to clean up, and any trace of lead is still too much lead.
Meanwhile, London (England), El Paso, Atlanta and San Francisco are just some of the major names that may soon, literally, run out of water.
Part of the problem is simply a lack of supply. Although desalination works, it has proven prohibitively expensive. Purification of used water also works, but it too can be costly, and the nation’s current water-scrubbing infrastructure is quickly becoming inadequate.
The trouble doesn’t merely lie in processing water, however. The United States, like most other developed or undeveloped nations, struggles just to get clean, potable water from point A to point B. Globally, the world loses an estimated two trillion gallons of drinking water every year simply due to leaky pipes.
Patching them won’t be cheap or easy though. The American Water Works Association estimates that the U.S. alone will need to spend at least $1 trillion upgrading and overhauling existing water transportation and processing infrastructure. Anything any organization can do to use less water, or recycle their own, in the meantime is a huge step in the right direction… a step that most institutions can take.
That’s where most of the names that make up the Powershares Water Resource Portfolio are aiming.
Bottom Line for PHO Stock
It’s certainly a different kind of stock pick. It’s much more than a trade. Indeed, owning PHO stock is much more than an investment in an undervalued and underappreciated sector. It’s an investment in a concept … a concept so big and so philosophical that it’s often difficult to see.
The rewards are there, though, for the truly patient investor. While PHO was a lackluster performer since the Best ETFs Contest began in early 2018, it’s battling for the lead as we near the end of the first quarter of 2019, and is well ahead of the broad market’s return for that full fifteen-month stretch just in the past three months.
These names are starting to collectively reap their due rewards, even if most investors don’t realize the undertow that has taken shape.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.