Water (Industry) One of Greatest Investment Mega-Trends of All Time (Forbes)

Mar.20, 2009 in Water Industry

(Feb. 10, 2009, Forbes Magazine)

We want oil and iPods, but we can’t live without water. That alone makes it the world’s most precious commodity. But, still, most casual investors might be hard pressed to think of ways to play H20, as it is seemingly free. There is no Exxon of water.

But maybe there should be. After all, there is a worldwide water shortage. Australia is going through its worst drought in 100 years, according to Prime Minister Kevin Rudd. Lake Mead and Lake Powell, the two largest basins for the American West, have seen below-average inflows for most of the last decade. California is now in the third year of one of its worst droughts on record.

So this is a scarce commodity with huge demand. Traditionally that spells pay dirt for investors. But does adding water just make mud?

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When it comes to water, the Forbes.com Investor Team is a bull in a fish tank. Robert Froehlich, chief investment strategist at DWS Securities, the retail arm of Deutsche Bank, calls it “one of the greatest investment mega-trends of all time.”

Marc Lowlicht, president of the wealth management division of Further Lane Asset Management, agrees that it’s one of the “better opportunities going forward.” Greg Ghodsi, head of the 360 Wealth Management Group for Raymond James, adds that since water is a fragmented industry it remains a growth story.

Still, should you take a sip? First, let’s take a look at some of the more obvious water-related plays. For those looking for some more broad-based exposure, there is the PowerShares Water Resources exchange-traded fund. It’s fairly substantial, with assets of $1.2 billion. It mirrors the Palisades Water Index, which has utilities, water treatment firms and infrastructure plays.

So far Water Resources has had a rough 2009, down 10.7%, versus 5.8% for the Standard & Poor’s 500. But over longer periods it’s outperformed, though it hasn’t exactly set the house afire. Over the past year it’s down 32.3%, versus 37% for the market, and over five years it’s down 16.8%, versus 26.7% for the market. It charges 0.64% of assets per year, and nearly half of its assets are in its top 10 holdings, so it’s a bit expensive for a concentrated sector fund.

Another ETF is the First Trust ISE Water Index, which mirrors an index that holds 36 water firms. Year to date, it’s about even with the market. Over 12 months it’s down 26%, beating the S&P. Since its inception, May 18, 2007, it’s down 26%, versus 44% for the market. First Trust has about 40% of its assets in its 10 largest holdings, and it charges 0.86% of assets per year.

Better news is to be found with some individual water-related stocks. One is Aqua America, a holding company for regulated utilities providing water or wastewater to customers in states including Pennsylvania, New York and New Jersey.

It has a $2.8 billion market cap and a comparatively strong stock performance. It’s up 1.7% in 2009, 1.9% over the past year and 29% over five years. It also pays a $0.14 dividend, so you get paid, too. A word of warning, though: The stock’s price-to-earnings ratio of 28 should at least give you pause before you dive in.

Ghodsi also notes that Veolia Environment is a global water play with a nice dividend. It better have one, as its stock has gotten crushed. The firm is a worldwide provider of water and wastewater services, with a market cap of $10.7 billion. Year-to-date it’s down 26%, over the past year its down 70% and over five years is down 19%. Short term, you’d save money showering in Evian. Still, its dividend of $1.89 should catch your attention. Unfortunately the firm hasn’t paid it since May 2008.

Other plays to consider include General Electric, which acquired Zenon Environmental, a water filtration maker in 2006. Water makes up a fraction of GE’s annual revenues, but plays an important role in the conglomerate’s long-term plans. And with GE’s stock down 65% over the past five years, GE’s long-term plans can’t start soon enough.

Aqua Dollars …

Lowlicht: From estimates I have heard, 2.6 billion people lack the ability to obtain clean water, and by 2025 two-thirds of the world will live in regions where water is scarce, according to the Department of Agriculture. I believe this is an area that has not received a lot of attention, and there is definitely an opportunity in this sector. I have been investing ProShares Water Resources Portfolio. The symbol is PHO, and it is an ETF that seeks to identify a group of global companies that focus on the provision of potable water, the treatment of water and the technology and services directly related to global water consumption.

Does anyone else have another way to play this sector? I believe General Electric may have some exposure here as well?

Ghodsi: In my opinion, there are two ways to play the water story. Under the sub-sector of water utilities you can find a few names of publicly traded companies. They continue to absorb the many small water utilities around the country. Most pay a decent dividend and since this sector is very fragmented there is a growth story.

Also the water desalination story is growing. Here in Tampa we have a plant, and it produces about 10% of the region’s water supply. You have to think this will continue to be the solution as regions of the U.S. and world run out of fresh water.

Froehlich: I think water will be one of the greatest investment mega-trends of all time. In my opinion, it is our most valuable natural resource. As the years roll by there will be more and more ways and opportunities for investors to benefit and invest in and from this trend. Right now one of the best ways is to invest in an infrastructure fund. Most of these funds invest in this water theme in addition to the roads, bridges, airports and seaports infrastructure.

In a narrow theme like this I would prefer to be in a packaged product (like a mutual fund) where you can achieve greater diversification for your investment dollar.

(Original Article Here)