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Water Company Stocks

Investing in the World's Most Precious Resource

By Nick Hodge
Wednesday, August 6th, 2008

There is a giant bull market that hardly anyone knows about.

It has people grappling for a scarce resource. It has businesses fighting for rights to it. It has pitted neighbor against neighbor, and state against state.

And it could make you some money.

Of course, being such a huge bull market, there are examples of it everywhere—in the headlines and news stories you read everyday.

Yet nobody seems to put the pieces together; no one has yet connected the dots in a meaningful way for investors.

Take, for example, an article I came across recently in the Los Angeles Times:

Across the countryside of this nation on the heel of the Arabian Peninsula, the pumps and drills roar. Wildcatters bore as much as 1,000 feet into the earth and draw out the valuable liquid. They pump it into tankers and haul it away to sell to the highest bidder.

Any rational person would assume this article was about oil. But it's not.

It's about water. The world's most precious resource.

Water Scarcity

That L.A. Times article was about Yemen, and its current struggle to provide enough water to satisfy both its population and its agricultural business. It's a task that's proving to be harder and harder each day.

The article continued:

As Yemen's exploding population draws out more and more water from the parched land. . . the bone-dry nation's very existence is threatened. The country faces its greatest water crisis, with underground levels dropping dramatically, scientists and government officials say.

Instead of conserving water as it becomes scarcer and more precious, more and more Yemenis are rushing faster and faster to extract it from the earth and capture it from rains for profit, pushing the country toward an ecological nightmare.

Interestingly, this is the same scenario that's currently being played out with oil or, more specifically, peak oil. So it begs the question: Are we about to face peak water?

More and more, the answer is yes. You see, the Yemeni water problem isn't an isolated event. It's one being witnessed by most countries in the world, both developed and undeveloped.

Certainly you've heard about the ongoing droughts in the American Southeast and Southwest, and in Australia, China, Africa, and the rest of the Middle East.

The Growing Water Problem Is A Factor of Many Issues

First of all, water is a finite resource. There is no more water on the earth today than there was hundreds of millions of years ago. There is no less either. We can't make it or destroy it.

And while our planet may be over 70% covered with water, less than 2% of it is freshwater. . . you know, the stuff we need to survive.

Of that tiny 2%, some water is perpetually tied up as atmospheric moisture or as frozen saturated soil (permafrost) that we can never use. Put another way, if all the world's water were in a one-gallon jug, fresh water wouldn't account for even a teaspoon of it!

The second part of the problem is the growing human population.

Water was first formed about 4.5 billion years ago. We've been around for only 60,000 years.  But in that time, our population has exploded.

And we've done it rather quickly. It took us all of history to break the 1 billion population barrier at the beginning of the 19th century. Since then, the world's population has grown exponentially to over 6.5 billion. We now add about 75 people every 30 seconds.

And most projections put world population at about 10 billion by 2050. That's unsustainable to say the least, unless we can come up with market-based approaches to lessen water consumption, use water more efficiently, and derive freshwater from saltwater resources via desalination, which is currently a very capital and energy intensive process.

If nothing is done, by 2025 nearly two-thirds of the world's population will be water stressed due to greater demands on freshwater resources by burgeoning human populations...the diminishing quality of existing water resources because of pollution...and the additional requirements of servicing our industrial and agricultural growth.

That's less than 20 years away.

Water Right Now: Shortages and Investing

Ironically, two-thirds of the world's population lives in areas that receive only one-quarter of the world's annual rainfall, while the most water-rich areas of the world, such as the Amazon and Congo River Basins, are sparsely populated.

Right now, about 450 million people in 29 countries are facing severe water shortages.

According to the UN, water and sanitation deficits affect about 50 percent of all people in the developing world and lead to the deaths of 1.8 million children each year.

Much like easily accessible oil, all the readily available water resources are in full use:

  • All surface and ground freshwater resources in Jordan, Israel, the West Bank, Gaza, Cyprus, Malta and the Arabian Peninsula are fully used.

  • It's now possible to wade across Lake Chad—which was once one of the largest lakes in the world and thought to be the source of the Nile.

  • Once the fourth largest lake in the world, the Aral Sea's surface area has shrunk by 60% and its volume by 80%. . . and it's still shrinking.

  • The Yangtze, Ganges, and Colorado, don't flow to the sea for much of the year because of upstream withdrawals.

  • In some places, the Ogallala—which supports America's breadbasket—is declining at the rate of five feet per year. Optimistic predictions say that the Ogallala will be depleted by 2020.

Perhaps an image of the current drought conditions here in the U.S. can give more tangible insight as to just how severe the problem currently is:

drought monitor

I could go on and on about the doom side of the water story. There is more than enough solid information and analysis to convince any sane person that there is real problem going on.

What's more interesting for investors, though, is that there's a boatload of money to be made from investing in the companies that are providing solutions to water scarcity issue.

Take, for example, the current state of the water infrastructure here in the U.S.

The nation has 800,000 miles of water pipes and 500,000 miles of sewer pipes.  Generally, these pipes are supposed to last fifty years. The most comprehensive research to date suggests that the average age of water infrastructure pipes in the US is 43 years.

Just this single piece of data implies that nearly the entire water pipeline system in the US will soon have to be replaced.

To overcome these obstacles, an investment upwards of $1 trillion will need to be made in the next twenty years. That breaks down to over a 150% annual increase over current spending amounts of $60 billion annually.

Water Company Stocks

Essentially, this is a massive wealth building opportunity. By staking your claim early in the water utilities, pipe and valve manufacturers, and desalination companies that will be providing lifeblood to billions of people, you have the chance to rake in hefty profits.

Just this week Mueller Water Products (NYSE: MWA), which makes water infrastructure and flow control equipment , announced its third quarter results. The result was net income of $20.3 million, much better than the $1.3 million loss in the third quarter of 2007.

Net sales from their U.S. Pipe segment surged 9.4% higher than the same quarter in 2007—a prime illustration of the infrastructure work currently underway.

Since the announcement of the results, Mueller's stock has gained as much as 25%. And there's probably more to come.

But Mueller certainly isn't an isolated incident. I expect this trend to continue for year. This is just the beginning.

Just look at Flowserve Corp. (NYSE: FLS), which develops, manufactures, and sells precision-engineered flow control equipment. That stock has been on an absolute tear over the past twelve months:

flowserve chart

And I have a water pipe replacement play in the Alternative Energy Speculator portfolio that is already delivering hefty gains to readers.

Indeed, there is much more to come from this sector. I'll keep you up do date here in the pages of Wealth Daily, and I'll continue making water-related recommendations in the Alternative Energy Speculator.

Call it like you see it,

nick hodge

Nick


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