Is Water More Valuable Than Oil? [Calgon Carbon Corporation(NYSE:CCC), Xylem Inc(NYSE:XYL), A. O. Smith Corp(NYSE:AOS)]

“exceptional” drought. This is the worst possible drought category.

The second worst category – “extreme” drought – covers 67% of California.

If the trend continues, we’re in trouble.

After all, over the next 40 years, the global population is expected to increase by 40% to 50%. In order to accommodate this growth, grain and oilseed production will have to increase 80% to 100%.

The impending agriboom may make water more important than oil. Why? Roughly 70% of global water use is for agriculture.

Increasing agriculture by 100% means a significant increase in water use. It’s clear that conservation and new technologies will all be part of the solution.

The water sector is really three subsectors: water treatment, water infrastructure and water desalination. Let’s look at each one.

Water Treatment

Water treatment falls into two categories. Water is treated to make it potable, and wastewater is treated to remove harmful contaminants.

Many communities, especially in developed countries, treat wastewater to the point where it is potable again. This is especially important if, as in most cases, the treated water is discharged into a river.

Calgon Carbon Corporation(NYSE:CCC) is a manufacturer of activated carbon, ballast water treatment, ultraviolet light disinfection and other advanced water-cleaning technologies. The company designs, fabricates and installs equipment that uses the company’s technology in water treatment facilities worldwide.

Another company in the water treatment space is Xylem Inc(NYSE:XYL). Xylem has a large family of products addressing the full cycle of water. From water collection, distribution and use to the return of clean water to the environment, Xylem’s equipment is part of the process.

Xylem’s Applied Water sector focuses on water use and conservation. It services the agricultural, industrial, residential and commercial markets.

Keep an eye on both of these companies as the population and demand for potable water increases.

Water Infrastructure

Most urban homes and businesses in America have clean water supplies. They also have wastewater lines to remove used water and send it to treatment plants. And there are two standout water infrastructure companies to watch.

There are few luxuries in life better than a hot shower. We also appreciate clean clothes and dishes. A. O. Smith Corp(NYSE:AOS) has been making water heaters for more than 70 years.

However, today the company is about much more than hot water. It’s now in the water purification industry.

Some of the company’s fastest-growing product lines provide clean water for consumers in China and other fast-growing emerging markets. The company is rapidly becoming a leader in water technology.

Another company in the water infrastructure sector is Mueller Water Products, Inc.(NYSE:MWA). For the last 150 years, Mueller has been manufacturing products to control and measure water.

The company is the largest manufacturer of fire hydrants, iron gate valves and butterfly valves in North America. It also manufactures pipe repair products, automated meter reading, pipe condition assessment technology and water meters.

Water Desalination

Many arid countries have limited or no access to supplies of freshwater. If they have a seacoast, many use a desalination process to produce freshwater. A few countries recognize the need for desalination plants and are on the forefront of desalination technology.

Israel, for instance, gets 40% of its freshwater from desalination. Earlier this year, Saudi Arabia began producing freshwater at the $7.2 billion Ras al-Khair desalination plant on the Persian Gulf.

When fully operational, it will be the world’s largest desalination plant, producing more than 264 million gallons of drinking water every day.

Saudi Arabia is the world’s largest producer of desalinated water. The kingdom has allocated $4.4 billion to desalination projects over the next several years.

One of the big players in specialized desalination equipment is Energy Recovery, Inc.(NASDAQ:ERII).

Plants using Energy Recovery’s technology produce more than 3 billion gallons of clean water daily. The company’s equipment recovers waste energy from the desalination process. These systems save 14 billion kilowatt-hours of energy annually.

That translates to more than $1.4 billion of energy cost savings for Energy Recovery’s customers annually.

A Diversified Approach

As I explained above, companies that purify, treat and conserve water – or who make the equipment to do so – are the ones to buy. But with all stocks, there is some risk involved. That’s why some investors may be interested in diversifying their investment through water exchange-traded funds (ETFs).

Since their inception about a decade ago, water ETFs have attracted around $2 billion in assets. The three largest water ETFs are:

  1. PowerShares Water Resources Portfolio (NYSE: PHO): It invests in companies making products designed to purify and conserve water for industries, homes and businesses.
  2. First Trust ISE Water Index Fund (NYSE: FIW): This ETF tracks the 36 largest companies in the U.S. involved in the wastewater and potable water industry. No single company has more than a 4% weighting in the portfolio.
  3. Guggenheim S&P Global Water ETF (NYSE: CGW): This ETF is the biggest global water ETF and 40% of the companies in it are water utilities. 

Its global weighting is 55% Western Europe, 30% North America and 12% Asia. In terms of water ETFs, in my opinion, this is the best of the bunch, returning 5.4% last year.

Long-term investors should consider exposure to water scarcity stocks or ETFs. Over the next several decades, water is going to become the new oil.

Good investing,

by David Fessler, Energy & Infrastructure Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

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