Merrill Lynch's Top Water Stocks to Buy

Face it, we cannot live without water. The reality is that, on the supply side, the world is facing an insufficient supply of fresh water, the distribution channels are uneven, quality is vastly different from location to location and climate change may be having an effect. On the demand side, use from industry, agriculture and municipalities is expected to grow, and grow fast over the next 20 years. In a new research report, the Merrill Lynch team lays out the staggering cause and effect that worldwide water use and need is perpetuating. They also list some of the top stocks to buy.

Here are four of the water sector stocks to buy from Merrill Lynch. They are all rated at Buy.

American Water Works Company Inc. (NYSE: AWK) could be the premiere name for investors to own. The company is the largest publicly traded U.S. water and wastewater utility company. It provides drinking water, wastewater and other related services to an estimated 14 million people in more than 40 states and parts of Canada. The company beat first-quarter earnings estimates and provided guidance that was in line with expectations. Investors are paid a 2.7% dividend. The Merrill Lynch price target for this top name is $49. The Thomson/First Call estimate is even higher at $50.71. The stock closed Tuesday at $47.06 a share.

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Ecolab Inc. (NYSE: ECL) is the global leader in water, hygiene and energy technologies and services that protect people and vital resources. With 2013 sales of $13 billion and 45,000 associates, Ecolab delivers comprehensive solutions and on-site service to ensure safe food, maintain clean environments, optimize water and energy use and improve operational efficiencies for customers in the food, health care, energy, hospitality and industrial markets in more than 170 countries around the world. The company posted strong new business wins during the first quarter of 2014, and it could be poised for another huge year. Investors are paid a 1.1% dividend. The Merrill Lynch price target is $122, and the consensus target is $117.94. Ecolab closed Tuesday at $105.70.

Pentair Ltd. (NYSE: PNR) got rocked last month when it missed earnings estimates, and this may provide investors with a solid entry point. While not the pure-play that the other names are, the company’s Flow Technologies segment designs, manufactures and markets products and services designed for the transfer and flow of clean water, wastewater and various industrial applications. This is a more ancillary industrial way to play the water sector. Investors are paid a 1.3% dividend. The Merrill Lynch price objective is $90, and the consensus target is lower at $86.06. The stock closed Tuesday at $76.36.

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Stericycle Inc. (NASDAQ: SRCL) recently announced the acquisition of PSC Environmental Services, a leading provider of environmental and regulated waste management solutions. The acquisition is expected to add approximately $240 million in annualized revenues. The company anticipates that it will take 12 months to fully integrate the acquisition and that it will be accretive at that time by $0.10 to $0.12 per share prior to any adjustment for transaction or integration expenses. This is a strong addition to the company’s medical waste business. The Merrill Lynch price target is $124, while the consensus number is even higher at $130. Stericycle closed Tuesday at $114.09.

These four top stocks from Merrill Lynch give investors two solid pure plays with water and two directly related plays that also have additional business segments. One thing is for sure, the incredible and increasing demand for water is not going away. Investors with long-term horizons could see incredible gains as more and more people start to realize the magnitude and earnings potential of the industry.