My Favorite Ways To Own The World's Most Vital Commodity Today

StreetAuthority Network

Thanks to subpar winter rain and snow in the Northern California mountains, the Southwest appears to be headed for another summer of water rationing -- something nearby Texas is already familiar with.

And water shortages abound elsewhere.

Across the globe, the Chinese government is building a massive pipeline to ship water from the country's humid south to the increasingly arid cities in the north, some 1,000 miles away. In the Middle East, battle lines are being drawn over the few vibrant fresh water supplies that remain.

But there is good news to all of this doom and gloom: There are some great investments to be had.

For this ever-thirsty planet, technology may come to the rescue. Huge desalination plants are coming on line; inland municipalities are gearing up to filter waste water, turning it back into fresh water; and farmers are learning how to use advanced irrigation methods to grow crops with less water.

This isn't a fast-growing business. Governments have slowly addressed the emerging water crises, so industry revenues typically grow less than 10% a year.

Yet spending on water treatment should grow over the long haul as equipment is upgraded and pockets of water scarcity emerge. Booz Allen estimates that $20 billion in global spending will be needed on water infrastructure through 2030.

And that may be an understatement.

"The United States Environmental Protection Agency (EPA) has projected that by 2019, $150 billion will need to be spent on drinking water infrastructure, and another $180 billion for clean-water infrastructure in the United States alone," according to analysts at the International Securities Exchange.

The ISE's analysts add, "The Chinese government alone plans to spend $120 billion over the next several years to ensure all of its citizens have access to clean, dependable supplies of drinking water."

What does this mean for you and your portfolio? As the world's water infrastructure grows, now's your chance to invest in a necessary commodity.

Here are some ways to invest in the world's thirst for water:

The Water Niches

You can cherry-pick the best of the companies that dominate their respective niches according to which area of water scarcity you think is most compelling. For example, American Water Works (AWK) now generates roughly $3 billion in annual sales through its management of more than 1,000 water treatment, storage and wastewater management facilities across the U.S. It's a fairly mature industry opportunity (annual sales growth is usually below 10%) but nicely profitable, as American Water Works generates 30% operating profit margins.

In a similar vein, U.K.-based United Utilities (Pink Sheets: UUGRY) offers the same services throughout Great Britain. In France, Veolia Environnement (VE) designs, builds and operates a variety of water treatment plants throughout Europe.

In the U.S., as farmers in the Midwest and Southwest grapple with ongoing drought issues, they are increasingly turning to Lindsay Corp. (LNN), which makes highly efficient irrigation equipment. The company's sales base doubled from fiscal 2007 to fiscal 2012 (to about $560 million), and analysts expect sales to rise by 20% this year.

The ETF Approach

Rather than focus on one company, investors can gain exposure to the whole group by owning the water-focused exchange-traded funds (ETFs).

The Guggenheim S&P Global Water Index (CGW), which carries a 0.65% expense ratio, owns companies such as Pentair (PNR), which sells components used in water treatment systems, along with wastewater treatment companies noted above. According to Morningstar, this fund has outperformed the MSCI World Index (a benchmark for all globally listed stocks) on a one-, three- and five-year basis.

Investors can also check out the PowerShares Water Resources ETF (PHO), which carries a 0.62% expense ratio and is mostly focused on U.S.-based companies. (There is also the PowerShares Global Water ETF (PIO), which focuses on Europe-based companies). Top holdings in the PHO fund include Pentair, Flowserve (FLS), Pall Corp. (PLL), Waters Corp. (WAT) and Watts Water (WTS). These companies make the filters, flow control and monitoring devices that major wastewater treatment firms use.

The First Trust ISE Water Index fund (FIW) tracks the ISE Water Index. The fund's prospectus says it is made up of global companies that derive a substantial portion of their revenues from the potable and wastewater industry, including niches such as water distribution, infrastructure (pumps, pipes and valves), water solutions (purification and filtration), and ancillary services such as consulting, construction and metering.

This fund carries a 0.60% expense ratio and has a decidedly domestic focus. Top holdings include Energy Recovery (ERII), a leading provider of desalination components, Mueller Water Products (MWA), which provides water-saving equipment to municipalities, and farm-focused Lindsay Corp.

The Investing Answer: The key issues driving the global water trends are just now deepening here and abroad. That makes these companies and ETFs well-positioned to capitalize on the long-term trend of heightened fresh water scarcity.

Related Articles

    View Comments (0)

    Recommended for You