Making The Long-Term Bet On Water

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Includes: ARTNA, AWK, AWR, CTWS, CWT, MSEX, RBEOF, SJW, WTR, YORW
by: Thomas Schumann Capital

Summary

Trends in agriculture and urbanism have sharpened demand for water infrastructure.

The current rally may fade, but the future is bright.

Investing in sectors related to water, or "blue gold" as it's called, is likely to be a strong bet.

We take it for granted but we can't live without it. Demand for water has been growing at a fast clip. A surge in agricultural products to feed an ever-increasing global population and advancing urbanization are pressuring the 2.5% of the world's supply that is fresh, as opposed to saltwater.

Agriculture already sucks up 70% of total fresh-water consumption. By 2030, food production will need to increase by 50% and energy generation by 85%, according to the World Bank. As such, the world is ill prepared for the most significant risk: water crises. Investing in sectors related to water, or "blue gold" as it's called, is likely to be a strong bet.

The Organization for Economic Cooperation and Development estimates that the cost of providing adequate global telecommunications and water infrastructure will be around $71 trillion by 2030. "You can see changes in the industry, like more intelligent infrastructure being created," says Paul Ang, portfolio manager at Summit Water Capital Advisors. "With the drought in the [U.S.] West, there's more interest in infrastructure."

IN THE UNITED STATES, CITIES are facing aging and dilapidated drinking and sewer systems. And, according to the U.S. Environmental Protection Agency, it will conservatively cost around $400 billion to upgrade water and sewer infrastructure nationwide. The U.S. water utility sector is fragmented and the scale of service varies, with some companies serving a few thousand local customers and others catering to millions across state lines. Yet rising water demand and continued shortages in certain regions make for an investment opportunity.

The devil is in the details, however. "It is easy to get mesmerized by these mega water trends such as scarcity, population growth, pollution, and globalization," says Deane Dray, managing director at RBC Capital Markets. "Just because companies are investing in water doesn't mean it's a good investment. It's important to know what kind of water business and technology the company is involved in."

So far this year, the Dow Jones Utility Average, which includes mostly electric utilities, has been one of the best-performing sectors, gaining 16.35%, compared with the Dow Jones Industrial Average's 6.19%.

Water utilities have particularly thrived. The largest publicly traded water company in the U.S., American Water Works (TICKER: AWK), is up 23.6% this year, while California Water Service Group (NYSE:CWT), which provides water-utility services on the West Coast and in Hawaii is trading 30% higher, and Middlesex Water (NASDAQ:MSEX), which operates in New Jersey, Delaware, and Pennsylvania, has seen its stock rise 26.3%. SJW (NYSE:SJW), which owns water utility and real estate subsidiaries, has surged almost 45%, while shares of Layne Christensen (NASDAQ:LAYN), a waste management, construction, and drilling firm, have gained 66%.

Still, some investors would prefer to bet on companies such as Xylem (NYSE:XYL), involved in the design, manufacturing, and application of technologies for the industry. Its shares are up 39.3% so far in 2016. Pentair (NYSE:PNR), an industrial manufacturing company that provides water filtration treatment to all Starbucks coffee shops worldwide, has seen its shares rise 29.3% so far this year.

A favorable risk/reward strategy balancing U.S. and European water sector performance includes a close look at top performing U.S. water utilities MSEX, Connecticut Water Service (NASDAQ:CTWS), AWK, Artesian Resources (NASDAQ:ARTNA), CWT, York Water Company (NASDAQ:YORW), Aqua America (NYSE:WTR), SJW, American States Water (NYSE:AWR) and Europe's leading specialist water funds Pictet, BNPAqua, RobecoSAM, Sarasin and Vescore.

The water rally may ebb over the near term, but the long-term prospects for blue gold remain.

Courtesy of Manuela Badawy, a commodities and emerging markets writer based in New York.

Supporting Documents

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Courtesy of Manuela Badawy, a commodities and emerging markets writer based in New York.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.