8/31/2012 2:14 PM ET|
Water: Good as gold for investors
The world's most critical commodity is getting harder to find, which makes it an attractive investment. Here are 10 ways to play it.
It's the global commodity that most deserves a place in your portfolio -- ahead of gold, iron ore, copper or oil, I'd argue.
And it's also the toughest to invest in. Water isn't traded -- in fact, in many countries it's not even metered. Pure-play water companies are hard to find, especially if you rule out the obvious but slow-growing water utilities. The leading companies in big swaths of the market are industrial conglomerates in which water has historically made up a relatively small share of revenues.
For example, among the top 10 companies in the Guggenheim S&P Global Water (CGW) exchange-traded fund, which is designed to track the Standard & Poor's Global Water Index, I'd call five of them water utilities and two diversified industrial companies with a presence in water. That leaves only three, or about 30% of the ETF and index, anywhere near the sweet spot in water. (More about what the sweet spots are later in this column.)
But this is changing.
As the individual parts of the water market get bigger, investors are seeing a wider array of pure plays. For example, orders for desalination equipment to convert seawater into water for drinking and industrial processing hit $5 billion in 2011, according to Global Water Intelligence. Those orders are forecast to hit a record $17 billion in 2016.
And it doesn't hurt that both companies and investors see water bucking the trend of other environmental sectors. As of Aug. 29, the Guggenheim S&P Global Water ETF was up 8.85% from last year, versus a brutal 38.53% drop for the PowerShares WilderHill Clean Energy (PBW) ETF.
A resource you can't live without
You can put together the investment case for water from the headlines.
Supply is falling. Droughts devastate -- depending on the year -- the United States, Australia, India, China and Argentina. Evidence mounts that the global climate is becoming more volatile, putting historic water-carrying weather patterns such as India's monsoon season at risk. Supplies of clean water shrink as underground aquifers are mined for limited supplies of water accumulated over millions of years. Clean water supplies also dwindle as existing sources are polluted by farm chemicals, inadequately treated industrial discharge and untreated urban sewage.
Amid all this, demand is rising. According to data from the United Nations, withdrawals of fresh water have tripled in the last 50 years, with demand for fresh water increasing by 64 billion cubic meters (64 trillion liters, or 16.9 trillion gallons) a year. Some of that is from global population growth of about 80 million people a year, at current rates. Some is from changes in lifestyles and eating habits that increase per-capita water consumption. And some is from soaring demand for clean water from farmers, industry and city dwellers. Add in increases in energy production (because tapping sources such as oil sands and biofuels requires more water than extracting from traditional sources of oil and natural gas).
The math is pretty simple: Falling supply and rising demand will drive the price of the commodity higher. Want to know where to invest in water? Follow the flow. In this column, it takes me to 10 water stocks in three categories.
1. Global water utilities
Rising prices for water will produce gains for global water utilities, even if those returns are capped by regulators at a specific return on invested capital. The best bet here is on water utilities that are building out infrastructure in places where water demand is rising most rapidly and new investment represents a large percentage increase over existing investment.
If that sounds like a prescription for investing in water utilities in developing economies, it is.
For example, Manila Water (trading in Manila as MWC.PM), which already supplies water for half the Philippine capital, has recently bought a 47% stake of Vietnamese water distributor Kenh Dong Water Supply and 49% of treatment-plant operator Thu Duc Water. The stock is up 43.86% in the last year.
Or Guangdong Investment (GGDVY), which supplies Hong Kong's water (and is up 33.97% in the last year). Or Companhia de Saneamento Basico do Estado de São Paulo (SBS), which collects, treats and supplies water in Brazil's São Paulo state (and is up 60.62% in the last year).
Stocks mentioned in this article include Xylem (XYL).
2. Wastewater companies
That math also adds up for investing in companies that handle and treat wastewater. More water consumed means more water as waste. More water demand means more demand for treatment services that turn dirty water back into clean water.
For example, Xylem (XYL), an October 2011 spinoff from ITT (ITT), focuses on moving water from distant sources and through increasingly complex supply systems, then treating and testing it. The company's water infrastructure unit -- which accounts for about half of its revenue -- gets its income from transportation equipment/pumps (73%), treatment (18%) and testing (9%). In 2011, 64% of the company's revenues came from outside the United States, which exposed the company to the recession in European economies (37% of revenue). As a result, the stock was down 5.36% in 2012 as of Aug. 29.
Since most of the company's European business is in the water-infrastructure unit, where customers are water utilities that derive revenue from their customers' water bills, I think the pullback to date is understandable. And it creates a buying opportunity for patient investors. I'll be adding shares of Xylem to my Jubak's Picks Portfolio.
3. Companies making more water
The biggest opportunity suggested by that math is investing in companies that create more clean water. God may not be making any more water, but human beings -- with enough money and energy -- are turning part of the current supply of seawater (and other brackish water) into water fit for drinking or industrial uses.
Current technologies for desalination use huge amounts of energy, so they produce water at a high cost. But when the alternative is moving San Diego to a wetter climate or giving up on the Saudi royal family's dream of an economy that can feed itself and turn its raw commodities into higher-margin chemicals, the high cost of desalinated water is relatively unimportant.
The cost is falling, though. Reverse osmosis, the current desalination technology of choice, produces clean water for about $1 per cubic meter. That's about 10 times the cost of water from traditional sources (which are limited, of course), but about half the price of water from desalination 20 years ago, according to the International Desalination Association.
If you'd like to get your desalination (and general water) exposure as part of an industrial equipment company with its fingers in a lot of infrastructure pies, I'd recommend General Electric (GE). The stock has been a member of my Jubak Dividend Income Portfolio since February.
If you're looking for more-concentrated exposure to desalination, I'd suggest turning to Singapore, which has become a world leader in the technology, thanks to the challenge of being a tiny city-nation with very limited sources of natural water.
Keppel (KPELY) combines three very timely businesses: construction of deepwater drilling rigs; waste disposal and waste-to-energy in Asia; and water desalination and wastewater treatment in Singapore, the Middle East and China. (The stock is up 2.7% in the last year.)
A more concentrated Singapore water play is Hyflux (HYFXY). The company has just completed a water desalination plant in Algeria and has begun work on a desalination plant in India. Profit in the second quarter climbed 21% year over year. China currently accounts for 20% of the company's revenue, and Hyflux is looking to grow that share to 33% within the next two years. (The shares are down 20.14% in the last year.)
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- SeaDrill sees revenue momentum
- Chinese hotel stock confounds sellers
- China slowdown paves way for stimulus
- Is Chinese hotel stock heading for a fall?
- Brazil's economy can't break out
At the time of publication, Jim Jubak did not own or control shares of any company or fund mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity, (JUBAX) may or may not now own positions in any stock mentioned in this column. The fund did own shares of Guangdong Investment, Keppel and Manila Water as of the end of June. Find a full list of the stocks in the fund as of the end of March here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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What is being missed here is the FACT that water is a natural resource and that in this country all natural resources belong to the people and that the government is only a steward of those resources and should be controlling them for the benefit of the people not the companies who sign contracts for the right to secure those natural resources.
This is a large problem indeed. We here where I live have good water, but to here the basic need of life is being bought and sold concerns me.
We all need air to breathe,water to drink, and food eat, so none of these should be traded by greedy Wall Street types anywhere in this world.
So does this mean if I have a water well on my property, it will soon be illegal because I am not buying that water? If someone pays to bore a hole in the ground on their own property, paids for the pump and pays for the electricity each month to have that pump pump the water, it will be illegal. Don't buy it. Not here in the South where water is still free if you have a hand pump like my friend has or your pump has a solar source for electricity.
Occasionally will buy bottled water, but with your own well and the new type of water filtration in stores, why buy water anymore.
desalinization plants I suppose need to increase their output and work on their technology. Many people around the world are living off these plants , especially some Middle Eastern countries. Obviously transporting enough of it for irrigation purposes and many other uses is impractical and this is where water treatment plants for irrigation and other uses not fit for drinking but for other uses is needed. This country needs a water plan just as it needs a coherant and practical energy policy. Just one more area where people could be put to work if the congress would get it's act together and just do the job they were hired to do. I believe until every incumbant and I mean every one reguardless of party needs to be voted out and new fresh blood brought in and start over again with a new bunch that do what they are hired to do. We the people can make this happen and whatever we allow them to do is our fault because we can vote them out. No matter how much money they have. In fact any politician that spends more than X amount of money on their campaign for reelection should automatically be voted out because they have spent to much time fund raising and not working or perhaps if they take more than X $$$ from 1 source they disqualify themselves.We are the ones that need to get our act together and just vote them out until they get the message we are fed up with the politics and nothing happening for us and the in this system how have the 99% allowed the 1% to take over everything? This mess is as much due our own apathy and self centered self indulgent instant gratification consumer gotta go into debt for everything and allow ourselves to be in the position to be exploited as anything. My fellow Americans we the people can fix this if we stop argueing over petty issues until the big ones are fixed and then we can focus on smaller issues that don't affect whether people work or get fed or educated. Finally I know this idea has as much a chance of happening as the 435 in congress getting it together. How did we go from 1940 where everyone worked towards a common goal to this in just 70 years and 3-4 generations.
Anyway the water issue in this country is fixable just like everything else if we work together.
I just drove thru central California known as San Joaquin, and is a blessing to see how much this valley produces.
Farmers have posted thousand's of sign's blaming Congress for the Dust Bowl. If it wasn't for water we would all vanish from this Planet, all of you should visit these rich Valley's of California and to be convince how important water is for all of life's.
We can send a man to the moon, we can send all kinds of space craft into space with cameras to take pictures, but we can not build desalinization plants to take salt out of sea water.
No wonder we are failing as a leader among nations.
This IS a growing industry and in about 10 to 15 years the prediction is there will be shooting wars over territory that contains drinking water or sections of land in which the water will be transported/refined. Even if the shooting wars don't happen DRINKABLE water will cost as much or more than oil.
Good example is India and the river system. Majority of the water is "unfit for human consumption" Some of the LARGEST fresh water reserves in the world, The river system is a festering cess pool, such as the Hudson is here in the US. WE SHOULD be able to drink this water, but we can't without severe issues like death. Yes Yes YES, we as humans have destroyed a good part of our future in this, CONSERVATION and REDUCTION in allowable pollutants ARE NOT GOING TO FIX THIS, It is to late to reverse the majority of damage in anything less that 500 years (I think that is the half-life of MTBE) The key is to get in with the companies who are trying to secure drinking water sources NOW either through investing or joining the company. QUIT COMPLAINING THE 1% DID NOT cause this WE DID as CONSUMERS. Help find a way to keep the current trend from going to all out war is the only solution available NOW.
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