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Water Utilities Are Poised To Continue Outperforming

Mar. 09, 2020 11:17 AM ETARTNA, ARTNB, AWK, CWT, SJW, SPY, WTRG18 Comments


  • Recent moves by bond markets and the Federal Reserve, as well as economic uncertainty arising from the Covid-19 virus, indicate a continued environment of low-growth, low-inflation, and low interest rates.
  • Water utilities have performed well under the low-growth, low-inflation, low interest rate environment.
  • Water utilities are a bond proxy.
  • The growth prospects of water utilities, especially through M&A, provide a secular tailwind to the sector.
  • Opportunistically add water utilities to your portfolio during times of volatility, with an emphasis on the utilities best positioned to grow via M&A.

Water Utility Investment Thesis

The growing outbreak of Covid-19 virus, or Coronavirus, has thrown a wrench in what had initially appeared to be another year of cruising to double-digit gains. The S&P 500 (SPY) notched a quick 8% over the first month and a half of 2020 before correcting 16% from its 2020 peak. It now sits at $297.46, down almost 8% on the year.

The threat of the Coronavirus has, at a minimum, dented GDP - forecasts for global growth of around 3% now look unsustainable, with a number of august institutions cutting forecasts to the 2%-2.5% range, with the potential for a steeper drop should the virus continue to spread.

The virus is impacting economic activity both directly and indirectly. The direct impact arises from a breakdown in production and trade as workers fall ill, businesses slow or shut to prevent the spread of infection, and the movement of people and labor becomes constricted. Obviously, given the outbreak centered in China, the world’s second largest economy and largest exporter, the ramifications for the global economy could be massive - especially since China exports many mission-critical components.

The uncertainty of the virus adds another wrinkle to the economic threat, as companies defer investment until they get a clearer idea of the economic impact of the virus. Even after the virus has been brought under better control, this hesitancy to invest can instigate a further drop in growth. With growth at a low rate and trending even lower, the Federal Reserve in easing mode, and 10-year Treasuries closing Friday at a record-low 0.71%, it’s not hard to imagine another round of rate-cutting and monetary stimulus to keep the economy from falling into a recession.

In an environment of uncertainty, low-growth, low-inflation, and low interest rates, I see continued outperformance of quality growth and steady

This article was written by

I specialize in water-related investments but also cover select energy, power, and agriculture equities. Much of my portfolio is related to this water-energy-food motif, though I also invest in dividend blue chips, healthcare, defense, and tech. I am not a professional investment advisor, please do your own research before making any decisions.

Analyst’s Disclosure: I am/we are long ARTNA, AWK, SJW. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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