Water is once again rearing its head in the equity markets.
Of course, I see the grim water picture as a perpetual profit catalyst for savvy investors. And I haven’t been shy about making my case for it (just search ‘water’ here, or at Energy & Capital, or at Green Chip Stocks).
But just so we’re on the same page, here’s how Reuters recently summarized the scenario: "Water shortages are on the rise, stemming from soaring demand, growing populations and rising living standards, and compounded by climate change."
Fixing this problem will require immense amounts of capital. The American Society of Civil Engineers puts the total requirement at $255 billion over the next five years.
Until now, getting the necessary funding has proven more than troublesome. And our water system continues to show us the results of delayed progress.
Paraphrasing something I wrote more than two years ago, providing adequate water funding requires raising taxes. And politicians, in their eternal bids for re-election, are hesitant to do that.
Enter the recession.
Fighting Recession with Water
As it turns out, investing in water has emerged, in tandem with cleantech, as one of the main vehicles to combat recession.
Of the U.S.’s $787 billion stimulus, $15 billion went exclusively toward investment in water infrastructure.
And according to the same Reuters report mentioned above, "GE estimates the global market, with subsectors including water technology and infrastructure, pollution control, water management and treatment, to be worth around $400 billion."
But when it comes to clearly understanding how to invest in water, it’s often hard to see the forest for the trees. Here’s what I mean. . .
It’s one thing to say that the stimulus dedicated $15 billion to clean water. It’s another to see where that money is going and profit from it. Average investors normally get caught somewhere in the mix.
To ease that knowledge gap for my readers, I’ve been keeping tabs on where that $15 billion is going. Here’s a peek at that list, with only the past four days of activity included:
Southwestern Pennsylvania Water Authority gets $5 million for water lines
Edenville Township gets share of $42 million Federal grants for water
EPA awards $121 million for Indiana water infrastructure projects
EPA awards $179 million for wastewater infrastructure in Texas
EPA awards $77 million for water projects in Tennessee
EPA awards $72 million for water infrastructure projects in Puerto Rico
Those are just the announcements since July 16th — nearly half a billion in water funding in less than a week.
If you’d been keeping track since stimulus funding started flowing, you’d be well into the billions.
From Stimulus Grants to Portfolio Returns
This is where most investors get lost.
You see, there are about 280 listed companies that count water-related activities as at least 20% of their business. And you certainly can’t invest in them all.
One way to approach this dilemma is by holding an ETF that focuses exclusively on water. These are the four I follow:
PowerShares Global Water (NYSE: PIO)
PowerShares Water Resources (NYSE: PHO)
Claymore S&P Global Water (NYSE: CGW)
First Trust ISE Water (NYSE: FIW)
As you can see from the chart below, this group trades in-step and closely mirrors the Dow Jones Industrial Average. But despite mirroring it, all four water ETFs are handedly beating the Dow over the past six months. Note how the industry took off a week after the stimulus was signed.
Other than holding an ETF, I tell my readers to look for companies that provide ubiquitous parts and services.
A major supplier of water-grade pipe, for example, will likely be indirectly involved in numerous projects like the ones listed above. So would specialty water engineering and consulting firms.
Here’s a chart of some of those players, with the Dow and water ETFs included for reference:
The water ETFs beat the Dow. But the individual specialized water plays beat the ETF.
Deciding how to play this boom is a matter of the individual’s appetite for risk and their investment time-frame.
Remember, the stimulus funds being doled out are driving up valuation psychologically. That money hasn’t hit the balance sheets of any publicly-traded companies yet and, as you’ve just seen, related stocks are up 30% in three months.
Water’s wheels have now been greased, but the real money will be made when projects actually start moving. You’ll want to keep a close eye on where the money’s going as that happens.
Call it like you see it,
P.S. Some of that money will undoubtedly go toward desalination. And I’ve been stalking the perfect play in that sector for months. This report outlines not only the benefits of desalination, but the one related company I think could triple.