Should You Buy Water Stocks Now, Or Wait Until There’s Blood In The Streets?

By: Dick Sterling | Mon, Apr 7, 2014
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Contrarians who follow the adage to "buy when there's blood in the streets" might find they've missed the boat when it comes to buying water stocks. If water turns out to be "the oil of the 21st century" as some are predicting, then the time to invest in water stocks is now.

Peak Water is the concept that the world's water is being extracted at a faster rate than it is being replenished. Some researchers believe the world has already reached that point, and certainly in some regions there's no question it has. Because water is crucial for life, a water-scarce world means more geopolitical clashes and social unrest. Violence, turbulence, chaos.

The great contrarian investor Jim Rogers has said, "There will be wars east of the Red Sea over oil and wars west of the Red Sea over water." He's probably right. Consider these facts:

Even with all these facts, I've barely scratched the surface. I haven't told you how the petroleum and agriculture sectors are intensifying the global water scarcity issue, or the extent to which the global elite have positioned themselves in key water resources. Those are topics for a coming post. As a theme, increased water conflict is assured. And as the worldwide supply deficit widens, increased retail and institutional buying will drive water equities higher. Herd investors will pile in. The smart money will clean up. Jim Rogers knows this.

All the facts point to one thing: the world is running short on fresh-water, and the problem is only getting worse. As the developing economies expand, so will their water needs. The coming decade will see early water investors doing exceptionally well. To those of us who are willing to position ourselves before the herd-buying kicks in, a real opportunity has presented itself. If you agree with me, the only question remaining is, Which stocks should you buy?

You can roughly categorize publicly-traded water stocks into four main categories: water treatment, water infrastructure, water rights, and water utilities. Together they represent a global industry which has been estimated at $400 billion. I've put together a partial list of water stocks here. Within these categories are several sub-categories which are particularly fascinating.

The water treatment businesses tend to offer the best growth potential, but also the most risk. They develop the technology, supply the treatment products, or provide the design and installation. Competition is intense, but many of these companies will be acquired, which is where our real upside is. This space will increase, the number of public companies will expand dramatically this decade --- you can see it already in the number of private deals, many of which have real legs.

Water rights companies are a different fish altogether. There are very few of them. Only a handful are publicly-traded. Municipalities have been buying-up water rights, often from farmers and developers, which is one reason you don't see many opportunities. But private equity groups have also been assembling portfolios of rights, which is one reason we could see some public deals floated in the coming years. There aren't enough players in this category to meet investor demand.

As for the water infrastructure companies, they are typically pipe/pump/valve/meter manufacturers and installers. They build, replace, and fix the world's water distribution networks. Worldwide, their market is enormous. They not only have to maintain and refurbish the existing water networks in Europe and North America, but they also have to design and build the new infrastructure requirements of the developing world --- especially China, India, and Brazil. The challenge is that their margins can be thin, but the sheer size of the opportunity is vast. There are several very good opportunities in this category.

Water utilities are the gorillas, and dominate the water sector because they are the ones which distribute and sell most of the water to the residential, industrial and agricultural customers. They are also the ones which buy the treatment technologies, the membranes and filters, the pipes and meters, the valves and pumps, and invest in the distribution networks, essentially acting as the conduit through which all the money flows. Many are regulated, some are un-regulated. They are often seen as safe-haven investments which offer a steady stream of stable dividends, and shares often perform well in a decreasing interest rate environment. But they don't offer growth, except for certain utilities in foreign markets.

Of the world's more than 250 publicly-traded water stocks, a handful are outstanding investment opportunities, several are mediocre, and the rest are to be avoided. Such is true of all equities --- there is wheat and chaff, and you need to separate them. But many water stocks are underfollowed, giving diligent investors an edge. I follow several of these water stocks, which you can learn about in my Sterling Intelligence email letter, which is free. If you haven't yet decided to reserve a section of your portfolio for water investments, I encourage you to consider it. I believe the sector offers investors tremendous upside, in both the near and long-terms.

 


 

Dick Sterling

Author: Dick Sterling

Dick Sterling
Editor, Dick Sterling Publishing
www.DickSterling.com

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: www.DickSterling.com

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