Brian Powers

Investing in Water and Water ETFs

John,

If you are looking for a desalination company, check out Consolidated Water (CWCO). They are based in the Cayman Islands and use reverse osmosis to desalinate water. They develop and operate water systems primarily in the Caribbean.

It is a small company with a market cap of $450 million. Their P/E has been between 30 and 60 for almost 3 years. P/Sales was between roughly 8 and 12 for the same time period. Short interest has exploded since August with the ratio now over 22. Insiders own about 10% of the shares outstanding and institutions about 55%.

Of course, do your own research.

I do not own CWCO, but it is held in PHO which I own.

Investing in Water and Water ETFs

Dano, I replied to your comment on my blog and will add it here as well. You make some good points. I agree that there is not a pure water fund that exists right now. It would be hard to do. It is difficult when many of the companies making the biggest profits from water are large conglomerates.

In my article I wanted to look at the global water situation and then compare the ETF's that were available in that industry right now. I do not claim they are perfect, but I am satisfied so far with my holding in PHO. I feel that in and of themselves, most of the companies are solid despite their importance as a pure play on water. Honestly, I think it is a good fund despite the fact that it is called a water ETF.

GE has 3% of its business in water. This is small. However, they are one of the most important companies in the water industry. It would be hard to ignore them completely in a water fund despite the dilemma. As I stated above though, I am comfortable with how this position is treated. In addition, I will say that GE, or Siemens are still excellent companies. I have no problem with exposure to them.

Franklin Electric? They design and build water well pumping systems. They had two acquisitions this year to pump up that division - Pump Brands, Ltd. (South Africa), completed in June 2007, and the pump division of Monarch Industries (Canada), completed in September 2007. Water sales were down in the most recent quarter.
(10-Q)
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Millipore cites strong demand for laboratory water products and higher sales in growing Asia/Pacific markets. It is not 100% of their business, but it is large and growing.
sec.gov/Archives/edgar...

Agilent also noted strong growth in water and waste testing despite the size of that business.
sec.gov/Archives/edgar...

Yes, some water utilities are in a tough spot, but in the long run, they will need to raise prices to deliver water. There is simply no way around it if the world wants water delivered to their homes. It will not happen overnight, but this is a long term investment for me, so I can be patient.

In truth, I look at these ETF's more broadly than just pure water plays. I look at PHO as an industrial ETF with exposure to utilities and tech. It is a focused fund and I like the companies. Perhaps I should have spent more time addressing this point.

Are these four specific water ETFs a gimmick? You may be able to make that point, but I do not think the need for water is a gimmick. Water is a fundamental need for all life and is not like "alternative energy" and "nanotech" which are emerging, untested industries.

The truth is this that these ETFs are not "right" or "wrong" investment vehicles. Your research may show you they are not for you. That is fine. If we all had the same strategy, no one would make money. I have done the research and am satisfied to have the 3/4 sized position I hold in my Roth IRA.

One other point, the alternative to holding a water ETF is to hold several individual companies. My account targets 12-15 security positions, so for me, this is the best way to play the industry despite its imperfections.

Thanks for your comments. They really made me think.

Good luck.