Let's Invest In Water

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 |  Includes: AWK, ESPH, OOIL, PHO, PIO, WTR, XYL
by: Mills Capital

Every day media is consumed with discussions about oil, gas, gold and other mainstream commodities. How prices are trending, how broader market events are influencing those movements and how this will affect money spent at the pump or what the value of my dollar is. And for good reason. These commodities are driving factors in our everyday lives. But amongst all this chatter, why do we fail to pay attention to water, the world's most important commodity?

Water covers 71% of the Earth's surface with the majority found in seas and oceans. Only 2.5% of the Earth's water is freshwater with 98.8% of that in ice and groundwater. Shockingly, only 1% of this water is drinkable. Globally, approximately 1 billion people lack safe water and 2.5 billion people lack proper sanitary living conditions. These conditions are worsening each day that passes. Reports suggest that by 2030, in some developing nations, water demand will exceed supply by 50%. There is a desperate need for greater supply and advanced technology.

One reason we ignore this commodity is because there is no actively traded market for the price of water. Because of this I have identified several instruments as possible investment opportunities. The below vary in risk and due diligence should be done on each before investing.

A safe place to start when considering an investment in water are two ETFs, PowerShares Water Resources (NYSEARCA:PHO) and PowerShares Global Water (PIO). PHO invests 90% of its total assets in companies in the water industry that create products designed to conserve and purify water for homes, businesses and industries in the United States. PIO invests in the same companies, but globally. I do warn that, as in all ETF investments, it is important to understand the assets contained within the funds and how daily price fluctuations are accounted for. Invest in the long term with caution on all ETFs not just these.

Next we take a look at the Water Utilities. These are safe investments with low volatility and decent dividend yields. Two to watch are American Water Works (NYSE:AWK) and Aqua America (NYSE:WTR).

American Water Works is the largest investor-owned United States water and wastewater utility company focused on owning utilities that provide water and wastewater services to residential, commercial, industrial and other customers. They currently service approximately 14 million people across 30 states. With a current market cap of ~$7.2 billion, American Water Works offers a dividend yield of ~3%.

Aqua America provides water and wastewater services for approximately 3 million people across 10 states. Aqua America currently has a market cap of ~$4.3 billion and offers a dividend yield of ~2.5%.

Xylem (NYSE:XYL) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services in over 150 countries. Xylem operates in two segments, Water Infrastructure and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment and testing of water, offering a range of products including water and wastewater pumps, treatment and testing equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial, industrial and agricultural markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment.

For the most recent quarter ended June 30, 2013, total revenue was $960 million, slightly lower YOY. Of that Water Infrastructure accounted for ~62% of total revenue and Applied Water accounted for ~40% of revenues. The Company has a market cap of ~$5 billion and too offers a dividend yield of ~1.5%.

Xylem has experienced its share of volatility lately. Earnings this last quarter disappointed big time as shares dropped as low as ~$23.60 off a high the previous day of ~$28.60. Shares at the time of this article trade at ~$27.00 representing a forward P/E of ~15x. Fundamentally there is room for shares to appreciate, but I do say that with caution as from a technical perspective shares traded and stayed below its 200-day moving average.

As we work our way down our risk profile I wanted to introduce two companies that have emerging technology that could revolutionize wastewater forever. These are highly speculative investments and I do urge everyone to conduct a serious amount of due diligence before even thinking about investing in either.

Ecosphere Technologies (OTCQB:ESPH) is a water engineering, technology licensing and innovative U.S. manufacturing company that develops environmental water treatment solutions for industrial markets throughout the world. Their Ozonix Technology offers a chemical-free alternative to high-volume water recycling for a range of applications including the oil and gas industry to municipal wastewater treatment. Here is a video of former New England Patriots quarterback and Ecosphere investor, Drew Bledsoe, on CNBC discussing the Company.

Lastly, OriginOil (OTCQB:OOIL), in a similar fashion to Ecosphere, has developed technology to rapidly extract organic contaminants from large quantities of water without using chemicals. Their technology is focused on harvesting or extracting various organic compounds such as biofuels, fossil fuels and ammonia from water. Here are several videos for your enjoyment.

Water is all around us and consumes our lives; it is an essential part of our everyday living. I find it prudent to address to the problem head on and learn more about what is being done to improve the supply of water and what companies are leading this effort. The ideas above vary is risk/return potential, but none the less your own due diligence should be conducted on each.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.