You Should be (Real) Long on Water
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People in America take many things for granted. One of the most prominent examples would be having clean water come out every time the tap is turned on. The average US citizen uses 150 gallons of water a day as compared to 20 gallons a day for even middle class folks in China, India and other emerging economies. Water is necessary for sanitation, cleaning and hydration. A lack of water kills faster than a lack of food, making water the most primary need for humans. For investors interested in water in emerging economies Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS) is a great move. It is well run in an emerging economy (Brazil) and has a decent P/E of 18. The P/E did jump recently and the valuation is near its 52 week high, but it is a company that can soar beyond current value because of the worldwide water situation.
Once all of the facts about water and world population are examined, it seems odd that a gallon of distilled or spring water would be less than a third of the cost of a gallon of gas. Despite the intrinsic necessity of water, it isn’t treated like coal, oil, gas or gold. The first predictions of this situation changing are starting to come out. Recently, Citigroup Inc. chief economist Willem Buiter stated that he believes that water will be an asset class in the next 30 years. In 2010 (the year for the most recent data) worldwide water revenues totaled half a trillion dollars without water even being an asset class. Water becoming an asset class will drastically increase the value of water-based stocks, hence the (real) long play recommendation.
In the US there are several water-based companies that offer attractive long term investment options. Aqua America Inc. (NYSE: WTR) is a Midwestern and East Coast based water and wastewater provider. It doesn’t appear to be overextending itself to pay healthy dividends because of a 62% payout ratio. More importantly, it deals in water, a commodity that won’t be taken for granted much longer.
A 2010 paper in the Proceedings of the National Academy of Sciences proposed three concepts of Peak Water: peak nonrenewable water, peak renewable water, and peak ecological water. The paper concluded the U.S. has passed all three peaks. While China has 20% of world population and less than 7% of its fresh water, even the US is looking like it has water issues on the horizon. That makes a company like Xylem Inc. (NYSE: XYL) a smart long term move. Water solutions, flow control, analytics and residential and commercial water make up the units of business for XYL. It’s an ITT spin-off giving it the focus of a small business and the resources of a large one.
The US Department of Defense has recently predicted that water will be the number one cause of wars in the 21st century. How can you not have water in your portfolio after a prediction like that? Consolidated Water Co. Ltd. (NASDAQ: CWCO) looks great after the DOD prediction since it operates seawater desalination plants and distribution systems in areas of the world where potable water is scarce or nonexistent. It has a small market cap, but recent growth in the company and the concept of desalination make it a great play.
Here in the US, a company like American Water Works (NYSE: AWK) looks excellent because they are prepared to do well rebuilding America’s aged and insufficient water infrastructure. You can blah, blah, blah all you want about statistics, but AWK is in the best position to profit from improving the infrastructure of a nation past all three forms of peak water.
A note to the dissenters: Don’t expect water to be cheap forever. The point of any water article should not be dividends, dividend aristocrats, recent trends, P/E ratios or any stock analysis. The point of this article is simple. Anyone reading this article will die without clean water. Water availability and purity is one of the top five concerns for global leaders. It is a nonsensical point of view born of childish expectations and self-entitlement (typically from spoiled Americans) to not realize the immense value of the most basic need for our species- water. I don’t care about current analysis, the writing is on the wall. Clean water is a vital resource in decline, the population continues to grow, even though it already puts a terrible strain on commodities, and the smart investor knows all this adds up to a very profitable long term play. Get in before water is a commodity class, a cause of wars and shortages cause spikes in stock values.
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