Top 2 Water Stocks And ETFs

Includes: FLS, PHO, PIO, PNR
by: Matthew D. McCall

World Water Day is on Friday, March 22 and it will once again put a spotlight on the issues surrounding the resource. Most Americans and citizens of developed nations do not consider clean water to be a problem. Considering I paid $15 for a bottle of sparkling water this week at a client dinner, apparently I fall into that category.

First, we must put the water issue into perspective by looking at some mind-blowing statistics. According to the United Nations (UN), 85% of the world population lives in the driest half of the planet, making for a scarcity of water for many. A total of 783 million people do not have access to clean water and nearly 2.5 billion do not have access to adequate sanitation.

The one issue with water in the future has to do with an increased demand for food around the globe. Food demand is expected to increase by 50% by 2030 and 70% by 2050 due to a growing global population. Water for irrigation and food production will put pressure on freshwater resources as agriculture accounts for approximately 70% of global freshwater withdrawals. That figure can rise to as high as 90% in some of the fastest growing regions, where water is already scarce.

The bottom line is that water is a resource the majority of us take for granted, but according to multiple studies there will likely be supply issues in the future. I am not stating you will not have drinking water, but farmers and large industrial corporations will have to invest large amounts of money into utilizing the water they do use on a daily basis.

From an investment standpoint I want to take a look at few stocks/ETFs that could benefit from an increase in spending on water infrastructure and services.

Water ETFs

The PowerShares family of ETFs offers two water-specific products. The PowerShares Global Water ETF (NASDAQ:PIO) has about half of its assets in industrial stocks with another 40% in water utilities. Two of the largest holdings are Flowserve (NYSE:FLS) and Pentair (NYSE:PNR), both of which are sitting near all-time highs. I will discuss each in more detail later in this article. PowerShares also offers the Water Resources ETF (NASDAQ:PHO), which has 60% exposure to the industrials and 22% to utilities.

The major difference between the two ETFs is geographic diversity. In PIO the U.S. makes up 40% of the allocation with the remainder invested overseas. Whereas, PHO has 100% of its assets in either U.S.-based companies or companies that trade on a major exchange as an ADR.

Of the two ETFs I would lean towards PHO because the goal is to gain exposure to the industrial companies that will benefit from higher demand for water. Nine of the top ten stocks in PHO are considered industrial, with only one U.S.-based water utility. If you want to use performance as a measure, PHO is up 22% in the last year with PIO only up 7%.

Water Stocks

Flowserve is involved in industrial flow management equipment that is used in a variety of sectors. One of their divisions concentrates solely on water resources around the globe. Due to the demand for large amounts of water being moved, FLS makes products to help facilitate that transportation. The company has also been supporting the desalination industry for over 50 years. Technically the stock is extremely bullish as it is currently sitting at a fresh all-time high. Even though it is overextended in the short term the fundamentals remain attractive with a PEG ratio of only 1.10.

Pentair is another industrial company that offers products and services for industries that rely on the flow of liquids. In regards to the water sector, the company provides pumps, valves, and pipes to both the commercial and residential customer. The company is comparable to FLS in that it is also hitting a new all-time high and the PEG ratio is a low 1.07. The company does pay a slightly higher dividend (1.7% vs. 1.0%) as well.

The combination of strong technicals, attractive fundamentals, and a long-term story make FLS and PNR my two favorite water stocks.

Investing Today for Tomorrow

I have been a proponent of investing in water for nearly a decade and I dedicated a chapter in my 2009 book, The Next Great Bull Market, to the topic. Even though I believe it is one of the major long-term investment themes of our time, investors must realize it will take time. As demand for water continues to increase it will lead to higher costs, which in turn will lead to more investment in the sector. This investment will be the catalyst for most of the water stocks to move higher in price.

If you are a long-term investor there is no better time to get into the sector because sitting on the sidelines waiting for water to be the big story will be too late.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.