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Investing in Water

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35

February 12, 2008 – Comments (11) | RELATED TICKERS: PHO , GE , WTS

Today, class, we are going to focus on something that you can actually invest in.  Meaning, you can take your hard earned (and rapidly depreciating) dollars, and buy stock in certain companies in a certain industry with a relatively good chance that you will do well in the long term.  The industry we are going to focus on today is: Water.

Fundamentals of water:

Water is essential to life.  Humans are made up of 50-70% water.  (Unfortunately for the older people, our water percentage decreases as we age.  This is why people shrink - this spinal discs in the back which are 90% water lose most of their water and shrink, and you get a loss of height.)  In the rule of 3's of survival, water is essential:

3 hours without heat

3 days without water

3 weeks without food

Water is also used for so many things, many of us in developed nations don't even think of it.  Brushing teeth.  Showering.  Making pasta.  Washing our hands.  Washing fruits and veggies.  Growing food.  Drinking coffee? need water.  Etc. etc.

Not only do you need water, you need clean, sanitary water.  To have clean, sanitary water, you need systems: aqueducts, pipes, pumping stations, reservoirs, waste removal stations, to just begin.  On top of this you need to maintain these systems, and you need to manage the water flows so that the pipes don't flood but always supply water to homes and businesses.  Just imagine how much piping and water pressure you need to get to the top floor of the Sears Tower in Chicago.

But North America is built out with water infrastructure.  So where is the growth?  Well, first, while it is built out already, many older cities have piping systems that are well over 100 years old and are failing.  In San Diego recently, a sewer pipe leakage caused a sinkhole.

Yes, it is true the North America is built out.  But what about the China, India, et al?

"Although access to drinking water has improved, the World Bank estimates that 21% of communicable diseases in India are related to unsafe water. In India, diarrhea alone causes more than 1,600 deaths daily—the same as if eight 200-person jumbo-jets crashed to the ground each day."

"Currently, more than 300 million rural residents, nearly a quarter of China’s total population, lack access to clean drinking water. A monthly report on water quality released by China National Environmental Monitoring Center in June showed that drinking water quality in 16 out of 113 key cities assessed was below national standards. Of drinking water sources, 74, or 20.1 percent of the total surveyed, fell short of quality requirements, while 527 million tons of drinking water, or 32.3 percent of the total, was unsuitable for drinking."

blah blah blah.. you get the picture.

The bottom line is this: Water is boring.  Water is essential.  Water as part of infrastructure will continue to play a key role in private-public enterprise.

How to Invest in water.

This simplest way: Water ETF.  These are the ones available:

PHO - Powershares Water resources

CGW - Claymore S&P Global Water ETF

The more difficult way:

Buy hundreds of gallons of water from Costco and store it.  (Not a bad idea but not great from a growth standpoint).

The individual stock way:

One way you can play it is with water utilities, included below (please forgive me if I've missed some water utilities):

VE (adr france), SJW, ARTNA, CTWS, CWCO, MSEX, UU, YORW, WTR, CWT, SBS (adr from brazil), CWCO, AWR, SWWC, PNNW

Best of Breed: WTR, VE, SJW

-Most of the utilities pay out a steady ~3% dividend and have very slow share price appreciation over time.  If you invest in utilities you will see this is a common occurrance, low volatility, steady dividend, generaly slow but rising share price over long time horizons.

The more agressive way is through materials and infrastructure.  Before that, there are some other companies that are in the PHO water ETF which I will show here:

MIL, A, ITRI, NLC, CCC 

MIL is an interesting play as they are labeled in the "health care" sector.  The reason they are included in the water ETF is that they purify water for laboratory environments.  Agilent develops water testing to make sure that water used in microprocessor manufacturing is pure. ITRI develops water meters.  NLC and CCC are companies that sell water purification chemicals and support services for water.

Here is a list of the infrastructure companies in PHO (which I will remind everyone is not an all-inclusive list, but contains a large majority of the companies that deal in water infrastructre)

ACM, ITT, PNR, PLL, VMI, DHR, AMN, URS, TTEK, LNN, GE, EMR, WTS, FELE, MWA-B, SI, ROP, IEX, BMI, LAYN, GRC, INSU

Phew that's a lot of companies.  I don't have time to drill down into all of them, but we'll dive into a few.  I can tell you that I do believe that Meuller Water, which many of you reading this may be familiar with, is one of the best of breed.  Their share price has been knocked down from last years highs, but I believe this to be a temporary drop.  They currently have a lot of debt they are paying down related to restructuring after splitting off from WLT.  If you look at the P/E, you would see a high number; this is due to debt and restructure costs.

Another company I like: WTS.  Watts Water Tech is likely the best buy of the bunch, because they have a much stronger presence internationally, good margins, fair cash/debt situation, plus it's been beaten down with the rest of the market.  And a healthy 1.4% dividend.  Part of their strategy is specifically in China, where they have a strong, growing presence, which gives you two big bonuses: 1. A strong presence in a growth economy that desperately needs water infrastrcuture, 2. Increased earnings in dollars as the yuan appreciates against the dollar.

GE: I can't tell you guys how much I like GE as an investment.  With new lightbulbs, all the infrastructure, diesel electric train engines, wind, nuclear, and water...  Infrastructure is something like 40% of GE's business.

Other good ones to consider: PLL, LNN (currently overvalued due to agribubble, but definitely strong growth potential), IEX, LAYN (many caps players also like this one, in fact as of right now 2/12/08 there are 207 outperforms and zero underporms), GRC, INSU

There are others that may be good.  The one thing I cannot analyze fundamentally are the civil engineering firms.  I have some good friends who are civil engineers (these are the people that design and engineer water systems as well as their maintenence), the company they work for is not a public company.

Conclusion

Caveat emptor as always in investing.  However, if you are looking for a steady growth industry that will continue to capitalize on the industrialization of the 3rd world, with a fair amount of well-run companies that sport decent earnings, decent growth potential, and many companies with seemingly good management, and in an industry that will be NEEDED forever and ever (we'll always need water - if we run out of oil can we say the same about CVX and XOM?), then look no further than water.

Please feel free to comment or question anything you've read on this post, and if you have a favorite water company or investment, please share it with the community.  

I will leave you with the link to the PHO Water ETF holdings webpage, so you can see the companies and tickers for yourself.  Best of luck investing.

PHO Holdings webpage 

Note: At the time of publication, Demondoug is long MWA-B in real life and in CAPS, and is long WTS, MWA, MWA-B on CAPS, and is considering long positions in real life and on CAPS of many of the other companies mentioned as well as the ETFs.

11 Comments – Post Your Own

#1) On February 12, 2008 at 10:21 PM, floridabuilder2 (99.32) wrote:

Great I have my assignment for this weekend is to investigate these great stocks...  I just have to wait for the massive sell off in the stock market in the next few months to buy with real dollars

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#2) On February 12, 2008 at 10:39 PM, FourthAxis (< 20) wrote:

Welcome to the PHO, PIO bandwagon.  Let the water wars begin.

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#3) On February 12, 2008 at 11:31 PM, DemonDoug (78.06) wrote:

Fourth Axis is right, just did a little more searching.  PIO is Powershares International Water ETF.  FYI it has Watts Water and GE as part of it. 

PIO holdings page

A company called First Trust also has a water ETF:

FIW holdings page 

 

 

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#4) On February 13, 2008 at 6:59 AM, devoish (98.58) wrote:

4, 5, 6, 7, 8, 9, 10 !   KO !? Will this be a kockout punch?

No position in Coke

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#5) On February 13, 2008 at 9:56 AM, Jro81 (< 20) wrote:

Why would I want to buy something that is essential for life, when I could easily buy C or some dumb homebuider ... I mean the Chinese need some more CDO exposure they don't need food or water ....

Jared

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#6) On February 14, 2008 at 8:36 PM, dwot (69.94) wrote:

I like the idea of figuring out where water investing would help, but I dislike GE immensely.  I have consistently had nothing but garbage products and quality, 4 services calls on 5 brand new appliances within two years to give an example, that I do not allow anything GE in my home. 

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#7) On February 15, 2008 at 1:21 AM, DemonDoug (78.06) wrote:

dwot, something like 40% or more of it's profits come from infrastructure type businesses.  It's almost like not buying an index fund because you refuse to invest in banks or tobacco - GE is basically an ETF of a whole bunch of companies that do widely different things.  Maybe a more apt analogy would be not investing in BRK-A or BRK-B because you had bad experiences with Geico.

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#8) On February 21, 2008 at 3:50 PM, tmer11 (23.90) wrote:

I bought some PBR at $90. Should I sale or hold?

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#9) On February 22, 2008 at 7:13 PM, LordZ wrote:

HMMM if you invest in jack daniels, you dont have to worry about the water in the jack going bad... lol ... also the more you drink, the better your environment appears.

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#10) On February 24, 2008 at 12:05 AM, abitare (33.92) wrote:

FYI - Jim Rogers China, Taiwan and Water Investment

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#11) On October 07, 2008 at 10:05 AM, joesgirl80 (< 20) wrote:

DemonDoug: What do you think of GE now?

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