News Analysis date published New: 
Thursday, October 21, 2010 - 12:26
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Thursday, October 21, 2010 - 11:52
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Thursday, October 21, 2010 - 12:26

This Frightening Shortage is Also a Lucrative Investment Opportunity

Thursday, October 21, 2010 - 12:26pm

Although most of us are too young to remember, imagine what it must have been like during the Great Depression or the Second World War. Shortages at those times had most everyone scrapping for basics like sugar, butter or coffee.

Such things may seem unfathomable now because post-World War II America has generally been a land of plenty. Some pretty tough times may be afoot, though. In fact, for a lot of the world's population, those times are already here.

Today, many people have a hard time getting hold of a commodity no one can do without. The problem affects tens of millions in Australia, Cuba, Pakistan, Mexico, Egypt and many other countries. With the combined pressure of climate change and population growth -- the global head count rises by 80 million annually -- the shortage could even be a major issue in the United States within a decade.

The commodity in question: water. We all need it, but it's increasingly likely to become dangerously scarce in the years ahead.

A response from capitalism
As you might expect in a market economy, companies have noticed the burgeoning water crisis and started developing solutions such as improved infrastructure, more efficient purification and better methods of making seawater drinkable through desalinization. Besides being vital in addressing the crisis, their efforts will create investment opportunities that are both noble and lucrative. Water utilities and other firms that own water rights may also deliver strong returns, depending on the company.

Look for mid-cap public water utility Aqua America (NYSE: WTR), for example, to return an average of +10% to +15% annually during the next few years on aggressive expansion of its customer base (the company currently provides water and wastewater utilities for several million residents of 13 states). Continued diversification into solar power is also expected to make important contributions to the company's bottom line.

American Water Works (NYSE: AWK), a mid-cap provider of water and wastewater utilities to 15 million people in 32 states and Canada, is also poised for market-beating returns like I've projected for Aqua America. Forecasted earnings growth of +15% annually will help drive those returns. But be aware the company is highly leveraged and has a short trading history dating back only to 2006. Its 3.7% dividend yield is somewhat better than Aqua America's 3.0% yield, though.

Companies with answers
Whereas water utilities have water rights on their side, innovators like small-cap purification firm Calgon Carbon (NYSE: CCC) are likely to outperform because they develop unique solutions. Calgon, for example, could return an average of +11% to +20% annually because of its rapidly expanding product capacity, which includes granular and activated carbon for removing organic chemical compounds from water and other liquids.

The company also has an ultraviolet light system for disinfecting drinking water, and counts the city of Boston as a major user of the system. Calgon is expected to have plenty of success finding other big customers for it in the U.S., Europe and Asia.

Other compelling water plays include Consolidated Water (Nasdaq: CWCO) and Energy Recovery (Nasdaq: ERII). You've probably never heard of them, but these small-caps are on course to grow annual earnings by +15% and +20%, respectively, for the next five years. Consolidated Water is becoming a leader in desalinization, while Energy Recovery manufactures technologies essential for desalinization. Both also have potential as lucrative buyouts.

If the added riskiness of small-caps turns you off, consider making General Electric (NYSE: GE) one of your water plays. The company is heavily involved around the globe in every facet of the water industry, including purification, infrastructure, desalinization and recycling. Plus, at about $16 a share, it's trading -35% below Morningstar's fair value estimate of $25 per share.

Action to Take --> From an investing standpoint, you can prepare for the growing worldwide water shortage by purchasing the stocks of companies that are taking the lead in finding solutions. I've only mentioned a few possibilities here. Your own research will undoubtedly turn up plenty of other promising domestic and foreign innovators from small-caps to large-caps.

For instant diversification, consider a water exchange-traded fund (ETF) like PowerShares Global Water (NYSE: PIO) or Guggenheim S&P Global Water (NYSE: CGW). The performance of water ETFs generally hasn't been anything to write home about, but they've only been around a few years. I expect much better returns from them as water availability issues become more serious.

P.S. -- For the past few weeks we've been telling you about some of the hottest investment opportunities for 2011. From tiny nuclear power plants that can be buried in your lawn, to revolutionary pain killers made from cobra venom, we're convinced the companies behind these products will soar in the coming year. To get briefed on these opportunities, and several others that we think could return many times your money, please read this memo.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.