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Companies / Water Sector
Mar 27, 2012 - 07:09 AM By: Money_Morning
Patrick Vail writes:
You've no doubt heard about the building scarcity of water. It's the reason savvy shareholders have been busy investing in water stocks.
Here's why.
Water may be everywhere but only 3% of it is fresh or suitable for drinking. Two-thirds of that is locked in glaciers and polar icecaps, which means less than 1% of the world's fresh water is available for human use.
That's the water found in lakes, rivers, reservoirs, and underground sources shallow enough to be accessed cheaply. Even still, much of that is polluted or otherwise unsuitable for consumption.
The water that's left is then used in agriculture and industry, and here's the kicker: It is divided between seven billion people... and demand is increasing all the time.
According to the United Nations, in the last century water use has increased at more than twice the rate of population growth.
Water has become so critical that Willem Buiter, chief economist at Citigroup, believes it will soon become "the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals."
That may be hard to imagine, considering we can simply turn on the tap and get fresh water for next to nothing.
But it's true. There are myriad of factors-from population growth to climate change-putting a strain on the world's water supply and causing demand to spike.
We'll look at those factors and how investors can benefit from this growing demand by investing in water stocks.
Investing in Water Stocks: Profit From Rising Demand
The biggest factor in the increasing scarcity of water is agriculture.
In 2012, American farmers will plant more crops than in any year since World War II. After two years of declining yields, this is good news for the agriculture industry, which is seeing commodity prices rise right along with global demand.
Around the world, the picture is much the same. China and India, too, are planting more this season.
The gigantic thirst for agricultural commodities this year means it will also be a huge year for water usage.
According to a study conducted by the University of Twente in the Netherlands, agricultural uses account for 92% of the global water footprint, a broad measurement that aims to quantify global water use and consumption.
What's more, fresh water pollution from agriculture is a worldwide problem that causes billions of dollars in damage. In developing countries, where fewer environmental regulations exist to protect the water supply, nitrate and phosphate levels are expected to rise steadily over the next few decades.
That will put further strain on the water supply - right in the places where demand for water is expected to increase the most. That means emerging markets.
That's because on average, each person in the U.S. uses 100 to 150 gallons of water every day, according to the Environmental Protection Agency. But in places like China and India, the average is closer to 20 gallons per day.
In fact, China and India already have the two largest water footprints of any country on the planet. And they're about to get even bigger as their consumption of commodities skyrockets - water included.
The surging demand for water in these emerging markets is going to require better "water solutions," or innovative ways of filtering and treating water to make it drinkable.
Better infrastructure to deliver fresh, clean drinking water to billions of new middle class citizens is also going to be needed, including filters, pumps, pipelines, and new processing plants.
That makes the growth in water stocks inevitable as billions of dollars is spent to meet demand.
Given the scarcity, the sums are tremendous.
According to the Organisation for Economic Cooperation and Development (OECD), global investment in water supply infrastructure needs to increase by nearly $500 billion by 2025.
While some of that money will go to fixing aged infrastructure in the West, much of it is going to be needed to manage increased demand in emerging markets like Asia, Latin America, and Africa.
Three Ways to Invest in Water Stocks
A great way to gain exposure to water stocks is to buy companies that deliver it.
Water utilities have provided a great defensive position for the past few years, but their value is going to rise in tandem with demand for water. (Keep in mind that some companies operate in a regulated environment, which usually means there's a cap on how much a utility can charge for delivery.)
One quality company is Brazilian utility Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE ADR: SBS).
SBS provides water and sewage services to nearly 24 million people in the state of Sao Paolo. The company has a market cap of over $8.6 billion, a very attractive P/E of 11.86, and a nice yield of just over 4%.
SBS has been on a tear since the start of 2012. Its share price has spiked 34% to $75.74. Given SBS is located in one of the world's best markets for growth, its excellent financials, and, of course, rising demand for water, the company can go higher still.
Another way to invest in water is through companies that create solutions to the problems of tapping, pumping, filtering, and delivering water to millions.
Pentair Inc. (NYSE: PNR) is a global water solutions company that manufactures water pumps, irrigation and crop spray equipment, marine pumps and accessories, filtration, softener, and deionization products and systems, and mid-to-large fluid management products and applications.
Basically, PNR is solving the problem of delivering drinkable water to customers around the world.
PNR's revenue grew by 14.83% during the most recent quarter, from $753.86 million to $865.69 million. And the company's expanding in the right places, with revenues in Latin America and China jumping 18% and 26%, respectively in 2010. With the coming growth in developing economies, PNR could go sky high.
Perhaps the easiest way to invest in water stocks is through the PowerShares Global Water Fund (PIO).
It's an exchange-traded fund that uses the Nasdaq OMX Global Water Index as a benchmark to track companies creating products designed to conserve and purify water for homes, businesses, and industries.
The fund invests in an array of stocks, including utilities and other management and delivery companies, equipment manufacturers, and solutions companies, so PIO is diverse. Sixty-five percent of the fund is invested outside the United States, in places where we know growth is healthy, like Singapore and Brazil.
Either way, you don't realize the wealth of the water until it's gone. Investing in water stocks is going to be one of the market's great long-term trends.
[Editor's Note: Chief Investment Strategist Keith Fitz-Gerald actually recommended Pentair Inc. to subscribers of our premium service Private Briefing back in early September.
The stock has already risen 18% since then -- with more to come, as this report shows.
If you'd like to receive those early recommendations from our experts - and in the process receive $26,000 worth of our best trading-service advice for just $5 - check out Private Briefing by clicking here.]
Source :http://moneymorning.com/2012/03/27/forget-goldman-sachs-only-fools-rush-in/
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