California's Scary Water Shortage Reveals a Unique Way For Investors to Profit

By: Dick Sterling | Wed, Mar 12, 2014
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There is a saying that goes "California is America's future" --- but I'd go so far as to say that California is the world's future, at least when it comes to water scarcity. California's water scarcity problem is a microcosm of what's happening globally. There is a worldwide deficit of fresh water, and it's only intensifying.

To summarize California's woes: Statistics say that nearly two dozen rural communities in the state are within 100 days of running out of drinking water, that certain critical reservoir levels have reached their lowest point in nearly 40 years, and that the snowpack is about 80 percent lower than it should be. Experts say it hasn't been this dry since 1895. And forecasters say California's water supply could run out in 20 years.

The human impact is substantial, because it affects not just drinking-water availability but also food prices. By far, agriculture is the main consumer of water. About 70% of the world's freshwater consumption goes to farming. Irrigation dramatically increases the fertility of farmland. Without water, yields plummet, and food prices skyrocket.

Farmers in California are being told their irrigation water will be restricted and as a result several thousand acres of farmland will be taken out of production. Farmers are literally ripping out water-intensive tree crops (such as almonds, for which there is already a deficit of production) in order to survive the water deficit. Since half the USA's fruits and vegetables come from the state, there will almost certainly be upward pressure on domestic food prices.

It's an oft-repeated axiom that investors should buy when there's blood in the streets. Times of crisis, chaos, turbulence. These are opportunities for forward-thinking investors to take a position. I would suggest that investors consider the global water scarcity issue as an opportunity. The long-term upside is massive, and it could be one of the most profitable investment strategies of the 21st century. But the problem has always been: How to invest in water?

The issue here is that, to start with, there is no uniquely defined water sector. Water affects everything. It takes 2,900 gallons of water to produce a pair of jeans, and a couple of thousand gallons to produce a pound of beef. Nearly 95 percent of the water you use is hidden in the products you consume. There are very few "pure play" water stocks. Still, there are about 250 publicly-traded companies in the world which are strongly water-related. I've put together a partial-list of water stocks which I think you'll find interesting (I don't endorse them all). I've assembled the list in order to give readers a launch-pad to do their own research. Some of the water stocks I've listed are junk, several are mediocre, and a handful are gems.

The investment niches aren't just limited to water utilities, water treatment suppliers, water infrastructure plays and water rights companies --- although those are the main categories, and are broadly how I sort the companies. Each of these niches has its unique attributes.

As an example: Water utility stocks can be exciting for dividends --- but not much else. Even so, I'll frequently look twice at a water utility if it has the potential to become an acquisition target (as several foreign utilities have been recently), or is in a geographical location whose population is skyrocketing, or if it has an additional business line with upside that the market is unaware of or has ignored.

As for water rights companies --- they are an attractive opportunity but there are very few which are publicly-traded. I can think of only a handful. The private equity groups have been acquiring water rights and I expect to see several public deals get floated in the coming two years, but in the meantime it's a pretty empty space.

Water infrastructure-related plays are a different story. It's true, their margins can be thin. But the good news is the worldwide market for pumps, pipes, meters and valves is in the hundreds of billions and, if anything, it's growing. The developed economies need their water distribution networks overhauled. Emerging economies need whole-new systems installed. It's the hardware manufacturers and installers which benefit. There are several good companies for investors to choose from but that's the subject of another post, there's just too much to talk about.

One sub-niche I particularly like is the agricultural irrigation manufacturers. The domestic market is booming but the foreign markets are going ballistic. Investors get exposure to increased global water demand and also expanding agricultural capacity in these deals. At least two good publicly-traded opportunities are amongst this group.

And then there are the water treatment companies --- yet another way to profit from the exploding worldwide water market. Desalination suppliers are included in this niche, but don't forget the chemical-treatment suppliers and filtration manufacturers as well. The opportunity for wastewater treatment is particularly attractive, and there are several sub-niches for investors to choose from. One is the so-called "toilet to tap" category. It's a catchy phrase which simply refers to wastewater reuse.

Governor Brown says California is facing a "mega-drought" which is why he's throwing his weight behind the toilet-to-tap concept. California will become the domestic leader in the wastewater-reclamation boom, but the phenomenon has already gone global. Singapore already gets about 30 percent of its drinking water this way, but China is forecast to be the biggest market for the technology.

The process is really not complicated. Microfiltration is followed by reverse osmosis and UV sterilization. Experts assure us that the water is safe and free of pathogens, pharmaceuticals and chemical residues. And whether you believe them or not, California's water crisis has set the stage for widespread consumer acceptance of the concept. Californians will either drink reused water, or go thirsty.

There are several overlooked water companies which specialize in developing and implementing this technology, and they all stand to generate big profits in the coming decade... But the real prize won't go to the domestic players as much as to those companies dominant in the overseas markets, specifically China.

One "little" company I've identified has revenues of more than half a billion dollars, an established history and is based in Singapore. Their primary market isn't California, but rather China --- where they've developed a substantial foothold. The stock trades at a relative pittance, and the company's chief executive holds about a third of the outstanding shares. Jim Rogers is a shareholder. The company is Hyflux and I've written more about it in my discussion of water stocks here. Hyflux is not a short-term punt, but rather a longer-term investment. It's one of several water stocks I'm particularly bullish on.

Water stocks can be ideal investments in several ways, not only because the commodity is essential to life and has become increasingly scarce, but also because there are dozens of larger companies looking to gobble-up smaller emerging players in the years ahead. All this will lead to an excellent investment environment in the decade to come, with plenty of domestic and international opportunities presenting themselves. And don't forget what I said about Hyflux --- the market has mostly overlooked this company even though its long-term prospects are excellent.



Dick Sterling

Author: Dick Sterling

Dick Sterling
Editor, Dick Sterling Publishing

Dick Sterling

As an economist and investment pro, Dick has been actively and unceasingly involved in the stock market for the past two decades. He is known for his contrarian, outside-the-box approach to investing, and his unique insights are always the opposite of mainstream groupthink. His ground-breaking proprietary investment tools include The Profit Machine, Mastering the Bubble, The Small Stock Formula, and Keys to the Investing Universe. Dick's commentary and publications can be found at his website:

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