Water is Red Hot

Brian Hicks

Updated April 15, 2005

Dear Wealth Daily reader:

Phantom Trader here. And I’ve got some big and profitable news.

While the broader market has been undergoing a brutal and devastating correction, my readers have been enjoying phenomenal gains. Even today when the Dow dropped another 100 points!


Water, baby. Water.

The world’s most precious and vital resource is in a massive bull market. And only a select group of savvy investors are participating in it.

I want you to take a look at the Dow Jones Water Utilities Index.

This is a three-year chart. But if you go back a decade, you’ll see that water is at all-time record highs.

In fact, the water index made a fresh record high today.

As of today, the NASDAQ is down 12% for the year. That’s a full-blown correction. However, the water index is up 9% for the year.

My #1 water stock, a tiny water company trading at a market cap of just $216 million, was up two full points today. It was a fresh record high. It’s also up 26% for the year as well!

The company – and its desalination technology – are literally changing the world, helping to convert seawater (which there’s plenty of) into clean potable drinking water (which there’s a shortage).

I believe the company – if doesn’t get bought-out first – is on track to becoming one of the world’s most important, and probably most valuable companies on planet earth. And I would be surprised if this stock tips the scales at $1 billion within the next 24 months.

But there’s more.

In today’s Wall Street Journal, Money and Investing section C, page 1, you’ll find the article "Water Sector Rides A Wave of Strong Demand."

The article starts off with this sentence: "Water is hot."

You got that right.

Last year, my readers made a quick 50% profit in just three weeks when GE announced it was buying water company Ionics.

But the gains are just beginning.

There are only a small group of water stocks. As this sector gets hotter, and investors begin to notice it as a viable industry to invest in, there’ll be a flood of money invested in the water industry.

And we’ll witness one of the greatest bull rallies the market has ever seen as "too many dollars chase to too few stocks."

Here’s the WSJ article:

Water Sector Rides a Wave of Strong Demand

By Gregory Zuckerman and Kathryn Kranhold

Water is hot.

Exploding global demand for water for drinking, agriculture and industry is creating a business boom for companies involved in the delivery, purification, storage and other aspects of H2O. That is prompting a slew of corporations-including General Electric Co., ITT Industries Inc., Siemens AG, Tyco International Ltd. and Danaher Corp.-to invest billions of dollars in water-related endeavors that are beginning to produce a wave of profits.

The surge in interest in the $400 billion-a-year global business comes as concern grows about the need to upgrade water resources to handle growing populations, give more people access to clean water and deal with a rapidly aging water infrastructure. Demand is growing so quickly that companies dipping their toes into water businesses say these operations are among their fastest-growing units.

GE, which has invested $3.2 billion to launch its water businesses over the past three years, says the unit could see sales reach as high as $10 billion in the next decade. ITT expects to see sales reach $2.6 billion for its water-related businesses in the next three years, up from $1.9 billion this year.

Water has caught the eye of Wall Street, too. Water- industry stocks rose 24% last year, topping the 11% gain in the Standard & Poor’s 500-stock index, and have slightly lagged behind the market so far this year, according to an index of water stocks compiled by Boenning & Scattergood, a West Conshohocken, Pa., brokerage firm. Over the past five years, water stocks have surged 113%, compared with a loss of 17% for the S&P 500.

Companies in the index include Watts Water Technologies Inc., a North Andover, Mass., company that makes water-quality-control products; Pentair Inc., based in Golden Valley, Minn., and focusing on the transportation, treatment and storage of water; and Milwaukee water-measurement company Badger Meter Inc. The share price of each has climbed about 40% in the past year.

Investors are flocking to almost any kind of company with a connection to water. Shares of Pico Holdings Inc., which owns real estate in the Southwest, have soared more than 50% in the past year, thanks to growing demand for the vast amount of water, and rights to use water, the company holds in fast- growing Arizona and Nevada. Dallas billionaire T. Boone Pickens and other big investors have put big money into buying water assets. Mr. Pickens has been behind an effort to transport underground water from the Texas Panhandle to San Antonio, Dallas and other cities.

"Water will emerge as the next growth commodity," says John Romero, who runs Aptus Partners LP, a Birmingham, Ala., hedge fund with about $50 million of assets that has been buying up water-related stocks, including Pico, Pentair and Consolidated Water Inc.

But some water stocks have already surged so much that some analysts say they are now over-priced. Richard Tullo, an analyst at research firm Gateway Research Reports, is cautious about Itron Inc., Spokane, Wash., which supplies services to water utilities and whose shares have almost doubles since October, and Cuno Inc. or Meriden, Conn., which makes filtration equipment.

The World Commission on Water for the 21st Century expects water use to increase 50% during the next 30 years. Only 2% of the world’s water is fresh, creating a need for companies to treat seawater and wastewater.

GE, in partnership with the Kuwait government and Mohammed Adbulmonsin Al-Kharafi & Sons Co., recently opened in the Persian Gulf state what is considered the largest wastewater-treatment plant in the world. With desalination costs plummeting in the past decade and now a more viable option for poorer countries, GE plans to open three to four desalination plants a year worldwide, at a cost of about $200 million to $300 million each.

As companies increasingly set up manufacturing in countries with inferior infrastructures, clean water is becoming more important. For instance, one ton of steel-in heavy demand in China-takes more than 20,000 gallons of freshwater to produce, says Jeffrey Saur, an analyst at brokerage firm Raymond James & Associates.

Most water-treatment plants and pipeline systems in the U.S. are more than 50 years old, and in some places more than 100 years old. Major upgrades are needed to meet more vigorous federal health regulations put in place to improve water quality and combat water-borne pathogens, says John Inch, a Merrill Lynch analyst.

To pay for the upgrades, water-utility rates are expected to jump in the years ahead, helping boost profits for companies that build, maintain and refurbish infrastructure, as well as those that deliver water to homes. Most homeowners long to have paid very little for their water, especially compared to their monthly electric and heating bills. But now prices could triple in the next three to five years, says Neal Berlant, managing director of the water group at Seidler Cos., a Los Angeles investment bank.

The vast majority of households still receive their water supply from municipal authorities. But a growing number of companies, led by Phila.-based Aqua America Inc., have been buying up local municipal water-distribution systems and smaller private water operators, boosting profits through economies of scale and improved business operations.

Water shares have never generated much hoopla on Wall Street, despite the strong gains.

But GE’s $1.1 billion purchase this year of water- treatment company Ionics Inc., for which it offered a 40% premium to Ionics’ share price, has sparked more enthusiasm for the business.

"We’re in the early stages of the evolution of the industry, and profitability has a long way to go," Seidler’s Mr. Berlant says.


Like I and others have said before, water has growth from here to eternity. Find out these details by checking out the Alternative Energy Speculator.


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