Investing in Water Stocks: How to Profit from 'Blue Gold'

by: W. Sean Owen

Until recently, few were aware of the large and growing worldwide shortage of clean, fresh water. Even in the U.S., water infrastructure is crumbling and will soon require a major overhaul. Awareness of the problem is growing, however, and investing in water stock (called "blue gold" by some) is now a hot topic among investors of all stripes.

The problem is bound to be exacerbated by global warming, as declining soil moisture levels lead to a depletion of fresh water tables world-wide. Therefore, potential government solutions notwithstanding, investing in water stock appears to be a wise long-term move.

The trouble is that the cat has been out of the bag for a while, and many of these stocks have been driven up to dizzying heights by speculators. Thus, while the long-term prospects for the sector are very bright, it can be difficult to choose the right way to play it. Here is a brief overview of some of the available options for getting into the sector.

Individual Global Water Stocks

The following overseas water stocks have been getting a lot of attention recently:

  • Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS) — is a Brazilian water utility, located in Sao Paulo. The Latin American market for clean water is big and getting bigger. SBS has been growing at double-digit rates for several years, and is a fine way to enter the strengthening Brazilian market.
  • Consolidated Water Company (NASDAQ:CWCO) — is a water utility in the Caribbean. It serves citizens of Belize, the Cayman Islands, Barbados, the Virgin Islands, and the Bahamas. Tourists have driven growth in demand, especially by golf courses and swimming pools. The problem is that the shares are expensive, making this a risky venture.
  • United Utilities PLC (UU) — a major British utility, it provides water and sewage services to a number of current and former Commonwealth countries.
  • Veolia Environnement SA (VE) — A big French water services firm, with a large and growing presence in a number of developing markets, including China. Veolia has recently been targeting the sea-water desalinization market, setting up operations in North Africa and Arabian territories. This market has huge potential, especially as global warming puts pressure on fresh water supplies. The trouble is that like other promising water companies, the shares have been driven up to eye-popping levels.
  • Suez (NYSE:SZE) — Another French utility, Suez operates both water and electricity services in Europe. The shares have been volatile because of takeover and merger rumors. In particular, Suez has been eyeing Gaz de France as a possible merger candidate, to protect itself from a takeover by Enel, and Italian utility.
  • Each provides exposure to water services in general, along with emerging markets and overseas currencies. This is all to the good, but again, the shares are expensive.

    Water-Related ETF Options

    The Power Shares Water Resource ETF (NASDAQ:PHO) is a good way to get broad exposure to the sector in the U.S. Based on the Palisades Water Index [ZWI], its core holdings include bright prospects like Watts Water (NYSE:WTS), and Insituform (INSU). Insituform is an especially interesting option. Its core product allows damaged water-lines to be repaired in place, without requiring expensive excavation. Future demand for this product should be substantial in the U.S.

    Investing in the whole sector by buying the Power Shares Water ETF can help mitigate the risks inherent in an overbought sector. If you want a more narrow focus, though, you might consider cherry-picking from its holdings.

    In addition, Claymore-Boenning & Scattergood have released two water-related unit investment trusts: the Global Water Equities UIT [CGWEAX] and the U.S. Water Equities portfolio [CUSWAX]. Again, you may consider buying into the UITs for broad exposure, or you can look into their core holdings to get ideas for individual stocks.

    Due to the recent speculative frenzy surrounding the sector, you might be best served standing aside for the short term, depending on your time-frame and tolerance for risk. Or you might want to add one of the ETF or UIT options as a core holding. But add a few individual water stocks to your watch list as well. We hate to buy overpriced shares, of course, but in the long run, water stocks belong in any smart investor's portfolio.