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Bulls Love Water, Longterm Water Ideas

Posted on: August 27, 2008 - Email Article - Printable Version

Santosh Sankar

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Water, unarguably the most precious natural resource in the world is attracting investors who find its longterm scarcity attractive. There has been an increasing concern about the future of fresh water supplies used in a wide variety of applications from farming to bathing. The environment is shaping up favorably for companies involved in water management, treatment, and distribution. I also believe that corporations involved in the manufacturing of the components used to lay down the water supply chain- pipes, brackets, filtration systems, etc. The growing concern for water has even attracted the likes of T. Boone Pickens has been quietly accumulating the rights to water, yes, water in Texas and the Midwest.

Before you read any further I will advise that many water companies have yet to operate profitably since they are growing and investing heavily in their operations. This is an obvious risk that should not be taken lightly; these companies have no free cash flow and post negative EPS for the most part. I would suggest that water ETFs are a better way to take advantage of the favorable operating environment while protecting your portfolio from the risk.

Pickens Loves Water

The most notable investor is T. Boone Pickens, the legendary energy investor who has surprisingly gone green with his interests. Pickens is a proponent of water and has jumped head first into the water management field. The establishment of Mesa Water in 1999 marked the beginning of Pickens’ mass acquisition of water rights in Texas. Texas established a law in the early 1900s that simply stated that “the biggest pump wins.” This meant that one could build a pump and essentially pump water right out of your backyard- the idea that someone could make money off your property did not excite Pickens. After accumulating rights to large amounts of ground water, Pickens strategically found ways to cash in on the imminent scarcity of water in urban Texas. To read in detail about Picken’s water plans, visit Business Week. Investors have followed this trend as water management companies have entered to capitalize on water as related ETFs are making a rise.

Water ETFs

As I stated earlier, water ETFs seem to be the best way to capture the boom in the water commodity/infrastructure market. Here are some solid ETF plays that show great potential as more people begin to tackle our future water problems.

PowerShares Water Resources [PHO: 14.8654, 0.00 (0.00%)]
First Trust ISE Water [FIW: 16.12, 0.00 (0.00%)]
Claymore S&P Global Water [CGW: 14.66, 0.00 (0.00%)]

PHO has hit highs of over $22 as the largest water ETF with over 2 billion in assets under management. FIW and CGW however have had a rough time but I do like them as a longterm holding. It is a simple move, all these ETFs are down YTD but water is scarce in the long run, in my opinion this is a solid buying opportunity. The companies these ETFs hold are set to receive great business as more and more people realize how grave our water issues can get. ETFs are diversified well over the utilities, bottlers, filtration, and pipeline entities that are set to explode. Do not be discouraged by the poor YTD performance if you are here for a LONGTERM enviromental play.

If you are looking for a specific company, General Electric [GE: 16.63, 0.00 (0.00%)] is committed to reducing water usage and has entered a joint venture to provide water filtration and management solutions. GE which has seen a lackluster year is providing investors with great buying opportunities as a leader in industry and in my opinion solid longterm growth prospects with their ecofriendly products.

Longterm investors should look at water and consider the long term opportunities present for companies involved in this business. I do not expect immediate gains with the current economic enviroment paired with the lack of urgency for proper water management. If you are unsure about this play, Pickens’ forsight should provide some guidance as the world faces not just energy problems, but problems with many of it’s natural resources.

- Santosh Sankar

Disclosure: The mutual fund the author is associated with is long GE.

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