It’s the most basic of human needs. I’m not talking about food. You can survive more than three weeks without eating.
Water’s a different story. The human body is at least 60% water, and can’t survive without it for more than a week. That’s in normal conditions. Raise the outdoor temperature or your activity level, and the need for water is measured in hours, not days.
For investors, water stocks are a great long-term place to park some capital. We’ll get to a few ideas in a moment. First, let’s look at what’s driving the increased global demand for water.
Our ever-expanding global population means long-term demands for fresh water supplies. In an article in Barron’s, Dimitra Defotis talks about Dublin, Ireland’s water conservation. Even though it rains a lot there, the city has a serious water problem.
Leaky old pipes mean that almost one-third of the water pumped through Dublin’s system never reaches the end user. It’s a constant problem of maintenance and repair.
Dublin’s not alone. There are over 1 million miles of fresh water supply lines in the United States. New York, Philadelphia, Boston and many other U.S. cities and towns ace similar leakage issues.
Every two minutes, the U.S. suffers a major water main break. Those breaks and leaks are responsible for two trillion gallons of water lost annually in the U.S.
Cost? $2.6 billion in lost revenues.
Wastewater lines have similar problems. There are over 800,000 miles of sewer mains in the country. Because of leaks and under-capacity during rain storms, over 900 billion gallons of untreated sewage is discharged into rivers and oceans every year.
Additional demands for water are driven by urbanization, population growth, regulation, industrialization and infrastructure rehabilitation. Many areas of the world experience water scarcity.
Freshwater shortage is a growing problem. Fixing it requires new and improved water delivery infrastructure, more efficient irrigation and better sewage treatment. It’s estimated that by 2020, nearly 45% of U.S. water and sewer pipeline infrastructure will be classified as poor, very poor, or life-elapsed.
Cheaper energy also contributes to lowering the cost of providing fresh water. The transporting and desalinization of water consume huge amounts of energy.
The shortage of water and America’s poor water pipeline infrastructure is good news for investors. It means they have a variety of plays to choose from when it comes to investing in the sector.
Water: More Valuable than Gold?
It turns out over the last five years water beats gold by a long shot. Take a look at the chart below, courtesy of ycharts.com.
It depicts the 5-year performance of the S&P/TSX Global Gold Sector Index (blue line) versus the Guggenheim S&P Global Water Index (orange line). The net change between the two is 135%.
There’s every reason to believe that water stocks will continue to outperform gold and even oil. Let’s take a look at a few examples.
One of my favorite water pick-and-shovel plays is Flowserve (NYSE:FLS). A pick-and-shovel play refers to investing in the companies that supply the tools, products, or services used by businesses in a given sector or commodity. Flowserve’s shares have more than tripled since 2011.
Flowserve is a leading maker of pumps, valves, seals and other fluid-controlling products. The company could see tremendous growth in the years ahead.
Why? The global fluid-control sector is a $130 billion market annually. Flowserve’s addressable market is $98 billion, and is on track to grow at 6% annually.
Global economic growth combined with increased industrial production is responsible for this growing market. Developing countries are increasing capital spending, which in turn drives demand for valves and pumps.
Flowserve currently has a 5% market share for its products. It aims to increase share by growing faster than the competition.
One of its advantages is addressing customers’ desires to bundle services. Flowserve does this by combining sales of pumps, seals and valves into one package.
Its customers are mainly energy construction and engineering firms. They’re the ones working on large infrastructure build-outs around the world.
Flowserve has 179 quick-response centers. These are located in 50 countries around the world.
Flowserve’s revenue has increased 7% annually for the past three years. While its growth has slowed this year, the company’s forecasting future growth rates of 8%-10% for at least the next four years.
Flowserve takes a disciplined approach to bidding on contracts, which in turn protects its margins and it shows on its balance sheet. The company has a 13% return on invested capital. That’s one of the best in the industry.
With shares trading 11% off their 52-week highs, now’s a great time to add this pick and shovel play to your water portfolio.
The Biggest Water Stock
Another company deserving consideration is the American Water Works Company Inc. (NYSE:AWK). American Water is the largest publicly traded water and wastewater utility in the United States.
It provides drinking water, wastewater treatment and other related services. American Water serves 14 million people in 1,500 communities in more than 40 states and two Canadian provinces.
The company continues to expand, primarily by acquiring water and wastewater assets in the U.S. and Canada. American Water pays a dividend of 2.58%. For the last seven years, the company has increased its dividend by 8% annually.
Standard and Poor’s Ratings Services recently raised its outlook on American Water to positive. American Water Works Company is another solid, dividend-paying water company worthy of an investor’s portfolio.
In my Wealth From Power newsletter, we’re capitalizing on our newfound energy surplus here in the U.S. From time to time, we’ll also be recommending infrastructure companies like the two I’ve profiled above.
How are we doing? We have nine stocks in our Wealth From Power portfolio. Three are profitable and two have double-digit gains. The rest are a few percentage points below our buy price.
We booked gains of 507% on one of our recent closed options positions. A number of our other picks had gains over 200%.
We just added a ninth stock to our portfolio this week. I expect to close out many more triple-digit gainers between now and the end of 2014. To find out how you can get in on the action and our anticipated profits, check your subscriber email for an exclusive invitation.
Profitably Yours,
Peter Fallon
