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Water has become a multi-billion dollar industry, so water stocks offer a solid investment case for long-term investors.
Analysts are even debating whether freshwater could replace oil to become the world’s most critical resource. As climate change leads to rising global temperatures, demand for freshwater is primed to grow along with an expanding global population that needs water to survive.
According to the Center For Climate And Energy Solutions, “Climate change increases the odds of worsening drought in many parts of the United States and the world.” Scientific research also highlights that droughts negatively affect the quality of freshwater.
Given that global freshwater has a limited supply, analysts expect water prices to surge faster than the inflation rate. This view bolsters the bullish case for water stocks as a safe haven from inflation. Moreover, the challenge of global warming is likely to lead to innovations in the technology used to source, purify as well as distribute water.
Research indicates that water has long become a crucial financial asset that deserves an allocation in long-term portfolios. For example, forecasts published by Global Water Intelligence suggest that “the value of the global water market, representing the sum of both operating and capital expenditures by utilities and industrial water users on water and wastewater, is expected to grow from $770 billion in 2018 to $914.9 billion by 2023.”
With that information, here are three water stocks to buy in November that should make outstanding additions to any long-term portfolio:
Water Stocks: American Water Works Company (AWK)
52-week range: $131.01 – $189.35
Dividend yield: 1.3%
Camden, New Jersey-based American Water Works is one of the largest publicly traded water and wastewater utility names stateside. The group serves around 3.5 million customers in 16 states.
Management issued Q2 results in early August. Operating revenue increased 7% year over year to $999 million. Net income came in at $207 million, up 18% from $177 million last year. Diluted earnings of $1.14 per share surged 17.5%. Cash and equivalents ended the quarter at $70 million.
On the results, CEO Walter Lynch remarked, ““In the first six months in 2021, we invested $782 million with the majority dedicated to needed infrastructure improvements to better serve our customers. … We added approximately 11,200 customer connections to date through closed acquisitions and organic growth. We also look forward to welcoming an additional 86,900 customer connections through pending acquisitions.”
American Water Works has been consistently growing by acquiring smaller water utilities. Management projects earnings per share to surge at a compound annual growth rate of 7% to 10% from 2021 to 2025.
AWK stock currently trades near $174 territory, up 13% year-to-date. The shares are trading at 38x forward earnings and 8.2x trailing sales.
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52-week range: $211.22 – $333.96
Dividend yield: 0.3%
Danaher designs and manufactures scientific instruments and consumables in three segments: life sciences, diagnostics, and environmental and applied solutions. Its products have been in the limelight during the pandemic as its diagnostic tests help labs detect the coronavirus. Meanwhile its life sciences tools help pharmaceutical names develop vaccines and therapies.
Management released Q3 results on Oct. 21. Total revenue increased 23% from a year ago to $7.2 billion. Net income came in at $1.2 billion, or $1.54 per diluted share, representing a 33% increase. Non-GAAP adjusted diluted net earnings per share surged 39% to $2.39. The company generated free cash flow of $5.2 billion, representing a 46% increase. Cash and equivalents ended the quarter at $2.6 billion.
Following the announcement, CEO Rainer M. Blair remarked, “Our team delivered another outstanding result in the third quarter, with over 20% core revenue growth and terrific earnings and cash flow performance.”
The Covid-19 pandemic has enhanced Danaher’s core business and long-term growth prospects, and the current earnings momentum is strong across all business segments. DHR stock is trading at $310, up 39% in 2021. Interested investors may want to wait for a dip to buy DHR shares, which are trading around 32x forward earnings and 8x trailing sales.
Water Stocks: First Trust Water ETF (FIW)
52-week range: $61.92 – $92.01
Dividend yield: 0.4%
Expense ratio: 0.54% per year, or $54 annually per $10,000 invested
Our final discussion centers around an exchange-traded fund. The First Trust Water ETF invests in companies that derive a significant portion of their revenues from the potable and wastewater industry. The fund was first listed in May 2020.
FIW, which has 36 stocks, tracks the ISE Clean Edge Water Index. Its equal-weighting approach decreases a potential top-heavy concentration. Mid-capitalization companies account for more than half of net assets, followed by large-cap companies with almost 35%.
The top 10 holdings in the ETF comprise close to 40% of net assets of $1.39 billion. The leading names in the roster include Tetra Tech (NASDAQ:TTEK), Roper Technology (NYSE:ROP) Ecolab (NYSE:ECL), Idexx Laboratories (NASDAQ:IDXX), Pentair (NYSE:PNR) and Danaher.
The fund has returned 25% so far this year and 36% over the past year. Price-earnings and price-book ratios stand at 31.8x and 4.1x, suggesting an overstretched valuation. A potential dip toward $87.50 or below would present a better margin of safety for long-term investors.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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