As climate and resource data continues to pour in from every corner of the globe, routinely proving humanity’s substantial effect on our only habitat, it is quickly becoming apparent that environmental protection is “in play” for investors.
Finding sectors and markets that are safeguarded from the slow-burn damage of climate change is now an imperative in 21st Century investing.
One area that is essential to not only global markets, but life as we know it, is Water.
While 70% of the earth is covered by water, only 1% of that is viable as a source of nourishment, making that tiny percentage an extremely important aspect of our civilization.
Unfortunately, too many take this precious resource for granted. Water is being overused all around the world, both individually and collectively.
From over-watering lawns and maintaining pristine golf courses, to fracking shale oil, supplementing major mining operations and supplementing industrial agriculture, it is obvious our water consumption is dangerously excessive.
Consequently, all of this is putting a strain on supply.
The World Economic Forum stated that by 2030, earth will face a 40% global shortfall. To put a local spin on this, at least 36 states had to deal with water shortages in 2013, and that number is expected to grow this year.
These factors, among others, have some analysts expecting well over $1 trillion throughout the next 25 years to be spent on water infrastructure expenses — in the U.S. alone.
While these are certainly causes for concern, they are also indicators of opportunity.
So let’s talk H2O stocks… Investing in water can be broken down into several relevant sectors, each of which contains a standout company that we will discuss in greater detail:
1. Water Treatment
First off, Water Treatment. Desalination, (i.e. taking the salt out of seawater) is what many people consider an ideal option for water security.
Costs are a concern, but a few companies are making impressive strides, including Veolia Environnement (NYSE: VE).
A French firm that has already built more than 1,700 reverse osmosis desalination plants in 85 countries, Veolia has a wide, diverse network of assets. With the desalinated water supply expected to hit 9.5% in annual growth this decade (54 billion cubic meters by 2020), Veolia is well-positioned to take advantage.
Further, the company is focused on reducing debt, while offering shareholders a solid 4% dividend.
Add the ugly but vital sewage component of their business, and Veolia may not be the prettiest stock in the world, but it will almost certainly be a force over the long-term when global water shortages become a larger issue.
2. Water Pipes and Pumping Systems
Next up, Water Pipes. Many pipes in the United States were laid 100 years ago, and a substantial amount of water is known to leak out of these somewhat inefficient systems (240,000 main breaks/year).
These old systems will need to be replaced, and this is where stalwart American Water Works, Co. (NYSE: AWK) enters the fray.
A big industrial player, AWK brings experience and a strong track record of dividend growth since 1954.
Current financial highlights include healthy revenue growth, good cash flow from operations (12.10 price/cash flow ratio), expanding profit margins (32.86% TTM), solid EPS growth (16.5% yr. over yr.)
3. Agricultural Irrigation
It is quite well known that Industrial Agriculture is a behemoth, and water use for irrigation has become a major topic.
Farmers must find ways to cut traditional water usage by massive amounts, and Lindsay Corporation (NYSE: LNN) is helping them do just that.
By combining advanced electronics with irrigation, Lindsay is focused on conserving water, energy, and labor for the agricultural industry.
With excellent cash flow growth and strong operating margins (12.59%), LNN is an industry stalwart that should be able to continue expanding as long as sales growth keeps pace.
4. Water Rights
Last on the list, Water Rights. Some people like to cut out the middle man and own the rights themselves, and Pico Holdings (Nasdaq: PICO) has used this strategy to build up a great diversified portfolio of water resources.
The holding company’s two major businesses are Vidler Water Company (water resource developer) and Nevada Land & Resource Company (largest private landowner in Nevada).
By snagging two large rights holders, Pico offers a safe asset play for investors with good potential. Their most recent report showed a 1300% increase in revenue from three years earlier ($337.38million), along with strong EPS growth.
As water-intensive projects like Tesla’s Giga-factory start breaking ground in Nevada, Pico’s severely undervalued stock price should start heading north.
Bottom line: Goldman Sach’s famously noted that “water is the petroleum for the next century,” and they might not be that far off.
There is a new environmental paradigm shift occurring, one where investors can confidently protect their portfolio by also protecting the planet.
Now is the time to start reaping major financial rewards from our most precious resource.