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Water is perhaps one of the most misunderstood and most under-invested themes for most investors looking for income and stability year after year.  It is also exceedingly harder and harder to invest in due to consolidation and due to unforeseen risks that are present in the economy.  Throughout the year we evaluate sectors and make our outlook picks.  Water is one of those sectors and it should be a part of most long-term investment portfolios.  Today marks the goal of picking the top water stock investment pick for 2011.

Looking through water investments is often a price-sensitive effort and investors rarely get to buy their favorite water stocks at big discounts.  In utilities, our review for the top pick in 2011 focused on Aqua America Inc. (NYSE: WTR), American Water Works Company, Inc. (NYSE: AWK), American States Water Company (NYSE: AWR) and California Water Service Group (NYSE: CWT).  We also went through the valuations and the outlook for Layne Christensen Company (NASDAQ: LAYN), Tetra Tech Inc. (NASDAQ: TTEK), and Watts Water Technologies, Inc. (NYSE: WTS).  In the land of ETFs, there are the PowerShares Water Resources (NYSE: PHO) and the PowerShares Global Water (NYSE: PIO) depending upon your geographic focus.

There is a clear winner for 2011 and we followed it up with a “runner-up selection” as to which water stock is the best pick for investors in 2011.  We have a basic table below for performance metrics and have added color with support for our top water pick for 2011.

Aqua America Inc. (NYSE: WTR) serves close to 3 million customers in various aspects in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, New York, Florida, Indiana, Virginia, Maine, Missouri, South Carolina, and Georgia.  American Water Works Company, Inc. (NYSE: AWK) is much larger and even more diversified in geographic footprints with over 16 million customers.  Neither is exactly cheap according to valuation metrics and both are effectively at 52-week highs.

There are a couple of alternative water utility investments but they all have too much California exposure for our preference against issues such as forest fires, mudslides, earthquakes, and a “state of mind state that is fiscally out of its mind.”  These include American States Water Company (NYSE: AWR) and California Water Service Group (NYSE: CWT).

We also ran through our major water universe and went through the numbers for Layne Christensen Company (NASDAQ: LAYN), Tetra Tech Inc. (NASDAQ: TTEK), and Watts Water Technologies, Inc. (NYSE: WTS).  We do like these on an opportunistic basis when the share prices pull back from highs, but owning the water and the utility are just currently better places to be considering the “state of states and municipalities” in the relatively near future.  There is more than ample business for all of these companies, but there just might not be money to support the project upgrades and expansions even if they are desperately needed.

The ETF products have been a bit difficult for long-term holders.  The PowerShares Water Resources (NYSE: PHO) offers the best of the domestic players and the PowerShares Global Water (NYSE: PIO) is sort of the same play but with a global focus and with less active daily trading volume.

Why is water so important, other than of course you have to drink it?  We evaluated this as “Investment Trends for Futurists” and water was a common theme along with themes such as frontier markets, lithium, gold, agriculture, rare earth elements, and more.  Despite the run-up, our top pick for 2011 in the water sector after perusing all the performance and valuations is American Water Works Company, Inc. (NYSE: AWK).  Watts Water Technologies, Inc. (NYSE: WTS) would probably be the runner-up in services and major project equipment but its recent share performance took it too close to our own fair value estimates for the next year.

American Water Works Company, Inc. (NYSE: AWK) remains our top pure-play water stock for 2011 despite shares having just hit a fresh high of $25.82 on the next to last day of 2010.  This was also named as one of our own Top Ten Stocks to Hold for the Next Decade, and there is no change there either.  The stock has a solid dividend at 3.50% that has grown and will continue to grow.  This should actually be considered a core holding for defensive investors and income investors alike. It is “American again” after the RWE spin-off and is the largest public U.S. water and waste water utility with about 16 million customers in 35 states and two Canadian provinces.  The utility offers near-monopolies for investors if you limit the scope to micro-geographic locales.  Future Cap-Ex concerns have to be considered along with future capital raises, but there is also plenty of room for water utilities to raise prices.  The downside for opportunistic value investors looking for bargains is that American Water Works rarely goes on sale via stock price drops.

We want to convey to our readers to keep American Water Works Company, Inc. (NYSE: AWK) on watch lists and use any market pullbacks as your chance to accumulate a position for 2011 and beyond.  Thomson Reuters has a one-year consensus price target of $27.25 versus $25.50 today.  On a longer-term basis it is not at all unfathomable that American Water Works could be a $30.00 stock a couple years out.

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JON C. OGG