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Is It Time to Invest in Water?

- By Nicholas Kitonyi

Much of the earth's surface is covered with water, either in liquid or frozen form. Clean drinking water is not as abundant by any measure, however. In fact, in 2013, the United Nations published a report highlighting that 85% of the world's population lives in the driest half of the planet, with almost 800 million people lacking access to clean drinking water.


In another recent study published by Beverage Marketing Corp. in the U.S., it listed bottled water consumption to have overtaken soft drink consumption by 39.3 gallons per capita last year, while carbonated soft drinks slipped to 38.5 gallons. The change is boosted by Americans who are now more health-conscious. This represents a great opportunity for companies operating in the water industry, which makes it an interesting option for investors looking to invest in basic commodities.

Publicly traded companies in the business of fresh water provide a good proposition for investment. You can hardly go wrong having any of the stocks in your portfolio because water has no substitutes, the demand is there and, if anything, it will only continue to grow. This industry has also caught the attention of other complementary players as they bid to get a share of the cake. These include the likes of water softener systems manufacturers as well as storage and drilling companies. Therefore, as people continue to fight against global warming, several companies and investors are likely to benefit if the scarcity of clean water continues to spread across the globe.

Which stocks should investors be looking at?

Fresh water - how much of it is out there? Is it enough to meet the needs of the growing population and changing lifestyles? How much is it worth now and how relative is the pricing? Who is supplying it and in what quantities? These are all great questions to consider when buying a water utility stock.

Moats are often important when buying a long-term stock. If you are looking for a long-term water utility stock, they do not come any better than American Water Works Co. (AWK). American Water Works is the largest traded water and water waste company in the U.S., with market-based operations in over 47 states and one Canadian province. By virtue of its industry-leading size and geographical diversity, American Water has often enjoyed unrivaled dominance in the market. The company has a market cap of $13.6 billion, with a beta of 0.19 and EPS of $2.68. EPS is projected to grow by 7.6% over the next five years. American Water has also increased its dividend payout each year since it went public in 2008.

Not every investor is comfortable with stocks that expose them to high risks. However, and often so, most of these stocks give back a good return. Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), also known as Sabesp, is worth considering by investors comfortable with a little bit of risk. The company provides water and water waste services in Brazil.

In the recent past, Sabesp was forced to endure a tough business environment spiraling around political turmoil and drought that ravaged across the southeastern region of Brazil. These factors coupled with recent swings in exchange rates between the U.S. dollar and the Brazilian real made the stock more and more volatile.

Regardless, Sabesp still came out on top and analysts are predicting the company will grow EPS at an average annual rate of 35.1%, making the stock an attractive option to investors willing to take the risk.

Artesian Resources Corp. (ARTNA) is the parent company of Artesian Water Co., whose services are embodied in northern Delaware. The company's water business accounts for nearly 90% of its total revenue. Artesian's share price surged over the past year with an astonishing 42.31% increase. This has triggered a flurry of positive sentiments from the investment community, including research and Wall Street analysts. The company's stock is currently ranked a buy by Zacks Investment Research.

Another interesting pick is AquaVenture Holdings Ltd. (WAAS), a pioneer in providing water-as-a-service deals in clean drinking water. While Aqua Venture may play in a different league in terms of customer base (with just about 40,000), its recent drop in price might be compelling enough for investors to consider it as a value play. The company delivers seven billion gallons of clean water each year, but this number is projected to rise as it continues to expand its customer base. The company shed off a better part of 16% of its share price over the past year, which is why investors could be looking to capitalize on a potential rebound soon.

Conclusion

Water is a basic commodity, which makes it both a defensive stock and a value play given the rising levels of global warming. There are several segments of the market that investors and companies can explore, but clean drinking water seems to be one of the best right now. As such, water softener manufacturers, drilling companies and purification system manufacturers present good candidates for further analysis.

Disclosure: I have no position in any stock mentioned in this article.

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This article first appeared on GuruFocus.