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California’s water crisis reveals a major investment opportunityDick Sterling When Governor Brown said California is facing a “mega-drought” he wasn’t kidding: certain reservoir levels have already dropped to their lowest point since the 1970’s, and some experts are predicting the state could run out of water within two decades. Long Beach just declared an “imminent water shortage” and more than a dozen rural communities are within 100 days of running out of drinking water. Thousands of farmers throughout the state are bracing for severe irrigation restrictions, with some even going so far as to pull their farmland out of production altogether. Could things get worse? I see California’s water problems as a reflection of what’s happening right across the planet, particularly in China. Imagine what’s happening in California and then multiply it by fifty. Today, more than two-thirds of China’s cities are facing water shortages, 80 percent of its rivers no longer support aquatic life, and water demand is expected to exceed supply by 25 percent within 15 years. There are about a dozen other scary statistics I could rattle off here but the point is clear: China’s water problems make California’s look tame. Whenever there is excess demand, prices must rise. In this country, water is artificially cheap, but it won’t stay that way. The world’s elite know this, which is why they’ve rushed into the water sector, particularly during the past decade. Already water represents a $400 billion global industry, with experts referring to it as “blue gold” and “the next oil.” But the difference between oil and water is that water is necessary for life and it has no substitute. The impact of water shortages cascades into every area of the world’s economies, but it very specifically affects food prices. Farming accounts for 70% of the world’s freshwater consumption. Irrigation dramatically improves yield, and therefore water scarcity directly leads to higher food prices. Take away abundant irrigation and you not only have food shortages but an economic crisis. Experienced investors know all this. They don’t need to be convinced that water is the “oil” of the 21st century. But the problem is: How to invest in it? When it comes to speculating in water there is a shortage of “pure play” companies out there --- in fact the number of publicly traded “water” stocks is limited to about 250 worldwide, and most of these are only partially water-specific. I've put together a partial-list of several dozen publicly traded water stocks which I think you'll find interesting (keep in mind I don't endorse all of them). The list is just meant as a tool to help you conduct your own research. As for ETF’s, there are several which focus on water but again, they’re mostly holding a mish-mash of corporate conglomerates which indirectly provide the water-specificity investors are looking for. To make matters more difficult, one can argue that there is no distinct “water sector” per se because the commodity is so critical to nearly every economic function. For example it takes 700 gallons of water to make a cotton shirt, 35 gallons to produce a cup of coffee, and up to 5 million gallons to frack a well. Nearly every business carries indirect exposure to water, which makes it difficult to neatly segregate water businesses. Still, there are several niches which offer investors a targeted way to profit from rising global water demand, including water utilities, water infrastructure companies, water treatment technologies, and water rights companies --- to name only four. Each of these niches has unique attributes. While it’s true that water utility stocks can be an attractive source of stable dividends, they offer little growth potential. Even so, sometimes I’ll consider a water utility when there’s the potential for it to be acquired (usually by private equity outfits --- more on that later), or if it’s in a metropolitan area experiencing massive population growth, or if there’s a secondary business line which offers some growth opportunities which the market is unaware of or has simply ignored. Then there are the water rights companies which are particularly intriguing as an investment but the catch is there are only a handful of them. The private equity groups have been gobbling up water rights and will likely float their deals as public offerings during the next two years. Meanwhile there isn’t much available for stock market investors outside of the few stocks which trade domestically. There’s much more I should say here but that will have to wait for another post. As for the water infrastructure-related companies, there are some very good businesses to choose from. Pumps, pipes, meters and valves --- these are in high demand as the world’s water distribution networks get built, replaced, and repaired. The worldwide market is in the hundreds of billions, and it’s growing, particularly in China, India and Brazil. Our domestic market is huge too, owing to the serious deterioration of existing infrastructure. The hardware manufacturers, integrators and installers are benefiting. This opportunity has legs, and should carry on for decades. Several good stocks here --- but again, that’s another post. I should mention one sub-niche which I like, and that’s the agricultural irrigation manufacturers. It’s because I like agriculture stocks, and I see these businesses as offering the best of both worlds --- water and farming. The domestic market is growing strongly and the foreign markets for irrigation equipment are exploding. There are at least two solid publicly-traded opportunities in this group which I plan to cover in the future. The water treatment companies are the other major water-investment niche. Not just desalination-equipment suppliers and installers, but chemical-treatment companies and filtration manufacturers too. I particularly like the wastewater-treatment players, which are very diverse --- with opportunities in frack-water, agricultural effluent, energy recovery and literally dozens of other applications. But one particular area within the “water treatment” niche is an attractive investment concept which Governor Brown has just given a boost to. It’s called water-reuse or “toilet-to-tap” technology and California is on-track to become the country’s leader in it. Singapore has been at the forefront of the technology, getting about 30 percent of their drinking water from recycled wastewater. The technology to treat wastewater isn't very complex. It’s simply a process of microfiltration followed by treatment through reverse osmosis and UV. It's not cheap, but neither is sourcing new fresh water supplies. According to researchers the reused water is clean, safe, and delicious. OK. The point here is that California is upping the ante and using the drought-crisis as the catalyst to push the water-reuse concept, which admittedly is disgusting but arguably necessary. Astute investors will make a killing by investing in overlooked water companies which specialize in developing and implementing this technology. However the real prize won’t go to the domestic players as much as it will to those companies active in overseas markets, specifically China. I’ve identified an overlooked company with revenues of more than half a billion dollars whose established market is in Asia with the bulk of their focus specifically in China. The stock trades at a relative pittance. The company has the credibility of being Singapore-based with a solid history. You can buy the stock here on the OTC market or directly on the Singapore exchange. Jim Rogers is a shareholder. The company’s chief executive holds about a third of the outstanding shares. The company is Hyflux and I’ve written more about it in my discussion of water stocks here. Hyflux is not a punt, but rather I see it as a longer-term holding. It’s just one of several water stocks I like. Water stocks are an almost-ideal investment opportunity in several ways, not only because the commodity has no substitute and is a requirement for life, but also because there are plenty of larger companies looking to acquire the dozens of smaller players which are emerging. These factors suggest an excellent investment environment in the years to come, with plenty of domestic and foreign opportunities. And remember what I said about Hyflux --- Wall Street has mostly ignored this company even though its long-term prospects are outstanding. ### Dick Sterling Copyright © 2014 Dick Sterling Publishing. All Rights Reserved. 321gold Ltd |
