Water Investing Long-Term Stock Picks (AWK, BMI, TTEK, WTS, VE, PHO, PIO, DGW, SBS, GE, MMM, ERII)
Water is the source of life. Many futurists believe it is the largest concern of the world in the years ahead. The water sector is also not the easiest to invest in. Many of the pure-play companies have been acquired and many of the key aspects of water are dominated by subsidiaries of global conglomerates. General Electric Co. (NYSE: GE) and 3M Co. (NYSE: MMM) are key examples of acquiring companies which have a bright future in various aspects water desalination and filtration, but these companies are fat too diversified to be true water investments. We wanted to pursue several of our own single ‘best idea’ strategies with snapshots based on today’s valuations and trends for investing in water companies that derive a substantial part of their revenues from water and give actual stock picks in water that have real upside.
For starters, many reports have been out about water’s scarcity and that securing potable water reserves in the future will be a challenge for many nations for the decades ahead. This is where the term “The International Water Wars” comes from. Making a blanket investment in water has so far been a difficult trend. The sector has given large rewards in some cases, and been very painful in other cases.
We are reviewing American Water Works Company, Inc. (NYSE: AWK), Badger Meter, Inc. (NYSE: BMI), Tetra Tech Inc. (NASDAQ: TTEK), Watts Water Technologies, Inc. (NYSE: WTS) and Veolia Environnement S.A. (NYSE: VE). For more diversified picks via ETFs, there are also the PowerShares Water Resources (NYSE: PHO) and the PowerShares Global Water (NYSE: PIO) to consider. Lastly there are two BRIC stocks that will require a judgment of your own, but those are Duoyuan Global Water Inc. (NYSE: DGW) and Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS) as the international emerging wild cards.
There are some key risks ahead in water that make investing in water not as sound as investing in other futurist asset classes. For starters, many ‘water companies’ grew because they were building new large infrastructure projects for all of those new housing communities that were built from the 1990’s to 2007. That business is gone for now, and many feel that it may be years before that business comes back in any meaningful way. Another huge risk is that water is unfortunately not immune to the economy, even if you die after a few days without water. Local, state, and even national governments around the world have to be able to pay for water investments via taxes, and we know how budgets are under pressure on all angles top to bottom. Another risk is protection and seizure, where local government may declare that water is a public asset and we have already seen many local and regional instances where the exporting or transporting of water away has been blocked. You have also likely heard where local communities are trying to prevent water companies from taking the local water and selling it elsewhere. Another consideration is that there is a movement against bottled water today despite the notion that local tap water is often contaminated, tastes bad, and is believed to contain trace elements of pharmaceutical products.
CURRENT DOMESTIC STOCK PICKS IN WATER
American Water Works Company, Inc. (NYSE: AWK) is our single best pure-play in water for the U.S. investor of our investing universe. This was one of our top defensive stock picks and it recently bumped up its dividend. American Water is the largest public water and waste water utility in the U.S. and it serves about 16 million people spread across 35 states and two Canadian provinces. This is not what investors would consider a home run stock, but it is also one that doesn’t strike investors out.
An implied dividend yield now of 3.8% is also a solid reward considering the investment climate for bonds and that many utility investments have mixed histories. This one offers water investors, defensive investors, and income investors the same outcome. At $23.15, its 52-week range is $18.91 to $23.77. No bottled water here; think tap water, showers, sprinkler water, toilet water, and water for industries. Investors hate paying at the 52-week highs, so any sizable pullback here should be used as a buying opportunity.