Pentair Has Likely Peaked - For Now

Includes: PHO, PNR
by: Jake Berzon

As clean water is getting more scarce and is being recognized as an underappreciated commodity, stocks of companies involved in all aspects of clean water (treatment, storage, conservation, desalination and resource development) are getting more attention. One of the strongest and oldest companies represented in the Palisades Water Index and the PowerShares Water Resource (NASDAQ:PHO) that tracks this index is Pentair, Inc. (NYSE:PNR).

Pentair Inc. is a diversified industrial manufacturing company with two operating segments: Water and Technical Products. I especially like their business of water filtration and their company policy of raising dividends annually for the past 20 years. I also like the technical strength the stock is currently showing.

What I don't like and the only reason I closed my Pentair position Wednesday is its current valuation. At a projected 2010 operating P/E of 20 and a trailing P/E of over 30, this stock is no longer undervalued and carries a substantial downside risk. In the long term, PNR will still do well, but mid term, I expect its price to stagnate. Should the general markets fall precipitously later this year - a good possibility - Pentair stock will likely fall more than the general indexes.

Looking even shorter term, I expect PNR to lose some of its recent technical strength after it announces results inline with expectations and goes ex-div next week. This should happen even if the general stock market continues its march to new 52 week highs.

If the markets behave, I would be looking to get back into PNR at the $30 level.

Disclosure: No positions