Water, Water Everywhere: But where are the investment opportunities?
- November 1, 2017: Vol. 4, Number 11

Water, Water Everywhere: But where are the investment opportunities?

by Benjamin Cole

The stark reminders came, ironically, in late August after Houston was flooded by up to 40 inches of rain dumped by Hurricane Harvey.

So what was Houston short of, after that deluge? A case of bottled water retailed for $99 in some locations, and even one Best Buy store, evidently oblivious to PR, charged $42.96 for a 24-pack of bottled water.

Water the world has, literally oceans of it.

Fresh H20 and drinking water? That is another story. As global human populations increase, the demand for clean water rises as well, even as limited fresh-water resources become increasingly despoiled.

Some figures regarding clean water are disturbing, even shocking. More than 80 percent of China’s rivers are too toxic for fish to survive, let alone for drinking. Americans who are old enough remember the day Cleveland’s Cuyahoga River — polluted from decades of industrial waste — caught on fire in 1969. Today, much of the developing world’s rivers have gone Cuyahoga and the United Nations calculates 1.8 billion people worldwide will face “water scarcity” by 2025. A scant percent or two of the world’s water is considered fit for human use.

And while a person may need only two to several liters of drinking water a day, each human consumes hundreds or even thousands of liters more daily of “virtual” water in the food they consume. In other words, it takes volumes of water to grow rice or corn, or keep cattle or pork watered, or to wash and prepare food and so on.

Water is ubiquitous and vital in human commerce, and clean water is necessary for drinking, cleaning, cooling, manufacturing and irrigation. Water is also key to urban sanitation.

For investors, rising demand but declining supply always spells opportunity. In mounting numbers, businesses, cities and nations are hunting for ways to access, conserve or reclaim clean water. There is little choice.

Wall Street has been looking at the water wave, though nothing yet like the abundant attention paid to gold, real estate, oil or tech. A hot, much-discussed “water IPO” has not really been seen yet. As an investing concept, water remains something of an outsider in Wall Street circles, a curiosity as much as an opportunity. In the coming years, that will likely change.

The world needs more clean water every year. Those businesses that can facilitate delivery of the clear liquid will be positioned to profit. But as usual, the money is made in execution, not in theory.


Investment gurus often slice the water industries into segments, such as water supply and disposal, water treatment and conservation, and then tangential plays, such as buying water-rich farmland.

The water supply and disposal segments are usually served by large, well-capitalized enterprises, heavily followed on Wall Street and by online platoons of stock pundits, and are perhaps best accessible through ETF investing (see Water ETFs Are Having a Great Year, below).

But the intersection of high-technology, innovation and water may offer some interesting plays for investors who accept risk into a portion of their portfolios.


One stock worth pondering is Pentair (PNR), a British-based large-cap that manufactures products to meet filtration, separation, flow and water management needs in major industry.

Investors have been mixed on Pentair; in the last three years it has traded below highs reached in 2014, though year-to-date through September Pentair stock is up 19.5 percent. The dividend is a modest 2.06 percent, but the company has a 40-year record of dividend increases.

Regarded as a solid industrial enterprise, Pentair is also poised on the practical cutting edge of aquaponics, aka hydroponics, that is the growing of fish and vegetables in artificial and sometimes indoor locations, even in cold climates.

Pentair designed and built the successful Hamms and Schmidt aquaponics facilities in Minneapolis for the Urban Organics company. The larger Schmidt location, in a former brewer’s factory, holds 87,000 square feet and has 14 fish tanks and 50 multi-story racks of greens. The site is able to produce 275,000 pounds of fresh fish and 475,000 pounds of produce per year, all USDA certified. The facilities use much less water than traditional farming, and effluence from the fish fertilizes the vegetables, while proximity to market is a logistical advantage.

Aquaponics is but one segment in the larger Pentair business empire. But Pentair has a growing presence in the field, the corporate heft to market and grow sales, and also a proven larger-scale project to show. There are expanding populations in the world’s dry regions, such as China and the Mideast, and seemingly limitless opportunities for aquaponics near every large urban center globally. Pentair could have interesting prospects ahead.


Trading near all-time highs on Wall Street and with a market cap of $11.4 billion, Xylem (XYL) is hardly a water-cult stock investment.

Xylem hits all the right cords for the H20-
obsessed. It engineers systems for water infrastructure, makes equipment for filtration, cleaning and testing for industry, offers online cloud-based services for remote management of water systems, and so on.

Xylem, trading near $62 a share in late September vs. mid-$20s in 2013, is about as pure a play in water as can be found in a sophisticated big-cap enterprise; many companies have exposure to water and water-products, such as a General Electric or a Siemens, but as part of a larger platform. Xylem is nearly all water. Sophisticated institutional investors like the stock, including BlackRock, which owned 6.7 percent of the company’s common stock at latest report.

On the soft side, Xylem offers a scant dividend near 1 percent, and its main business is the steady but undramatic building or rebuilding of water infrastructure for governments or regulated industries. While Xylem can be expected to win its fair share of contracts, there are no big gushers of profits in the picture, just the grind of winning more contracts. And with the slim dividend, investors will have to wait for capital appreciation in a mature industry, with Xylem already at healthy price-earnings ratios.

Still, for investors who want long-term exposure to the water world, and a balance against cyclical stocks, Xylem is certainly worth looking at.


As aquifers dry up, and water rights become contested or bought out, farmers will want or need to use less water. Valmont (VMI) is the United States’ largest manufacturer of mechanized irrigation equipment to help farmers economize on the use of water.

After a spectacular five-year run-up on Wall Street to the year 2013, Valmont’s share price has been flat as a lake, and as of late September traded at a relatively modest 19.63 trailing price-earnings ratio. Investors who missed the boat before 2013 may now have a chance. Valmont has been shedding some noncore units, and U.S. crop farm incomes are rising again after sustained droughts in many regions.

With a $3.58 billion market cap, and strong institutional ownership (again we see BlackRock; they own 7.83 percent of common shares), Valmont is a solid choice. However, Valmont offers a scant 1 percent dividend, and it is not a growth stock, but rather one for patient investors. The downside risks seem limited, as farmers will always need to irrigate crops.


One might expect utility stocks, including water works, to offer solid yields since they are not growth stocks and operate in regulated markets.

But compared to many REITs or energy-
sector dividends, water stocks offer a thin stream of payouts. A darling among water-investment gurus is Aqua America (WTR), a Bryn Mawr, Pa.–based water and wastewater utility with about 3 million hook-ups in Pennsylvania and the Midwest.

Aqua America offers a 2.43 percent dividend, which is actually high for an industry that pays an average dividend of 2.14 percent. Of course, interest rates are low, with 10-year U.S. Treasuries offering a scant 2.25 percent in late September, so investors are pushing down yields on secure dividend stocks, such as Aqua America, as well.

On the bright side, Aqua America has paid dividends for 70 consecutive years, and has increased its dividend for the past 23 years in a row. For very long-term investors willing to wait for higher dividends, Aqua America might fit the bill.


The water sector has had nothing like the dot-com bubble, the gold booms, or real estate spikes and busts, and thus there has never been a hot initial public offering (IPO) season for water stocks.

But if there was a trendy water-sector IPO, it was AquaVenture (WAAS), when it went public in October 2016 at $18 a share. Operating globally, AquaVenture sells filtered water systems to about 40,000 institutional and commercial customers in the United States, and owns and operates desalination and wastewater treatment plants multi-nationally. The business model is to buy more water-businesses, something of an “industry roll-up,” with expert management provided by AquaVenture’s operational headquarters in Tampa.

Investors liked the story; by year-end 2016, just months after its IPO, AquaVenture was trading near $26 a share.

AquaVenture used IPO proceeds in part to acquire a desalination plant in Peru, which is part of its business model of buying desalination plants internationally and wholesaling clean water back to plant sellers. The basic idea is that AquaVenture can upgrade and better operate a desalination plant than previous operators, often in less-advanced nations.

But after nearly a year as a public company, AquaVenture shares were selling for $14.44 in late September, well below the IPO price.

So what happened? One problem has nothing to do with water, and everything to do with IPO structuring. There were existing AquaVenture shareholders, essentially pre-IPO investors, who were precluded from selling their shares before April 2017. They owned a whopping three-quarters of the shares outstanding.

Also, AquaVenture is not profitable in GAAP terms (as expected) but missed on Street earnings and revenues expectations when it reported its second-quarter financial results in August. In brief, the company lost an adjusted 21 cents a share vs. the consensus forecast of a 14 cent loss.

In a second-quarter conference call, company officials said organic growth would run in very low single-digits, meaning that acquisitions would be the growth engine, but also noted the recent desalination plant buy in Peru had met some challenges.

The consequent pressure after the second-quarter earnings from institutional sellers and the wider-than-expected losses sunk the stock.

For investors, AquaVenture is a caution flag, a reminder that investments in any equity sector can go sideways. A good idea, even reasonable execution, is no assurance of a win on Wall Street. Accordingly, some investors may feel better in water ETFs or mutual funds, where the number of holdings reduces the risk to investors of any one company’s misfortunes.

If there is a happy ending for AquaVenture, it may be for those taking the plunge in the stock today. Wall Street analysts are gravitating back toward the “buy” column, at the lower post-IPO price.

Benjamin Cole ( is a freelance writer based in Thailand.

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