"Water, water everywhere, nor any drop to drink."
This line from Samuel Taylor Coleridge's poem "The Rime of the Ancient Mariner" is apropos not only for those lost at sea but for the Earth in general.
The Earth is indeed the "water planet," with more than 70% of its surface covered with the liquid. However, more than 97% of this water is unusable salt water, meaning freshwater accounts for less than 3% of the world's supply. Of that total, more than 70% is frozen, resulting in a very limited supply of usable freshwater. Only 0.007% of all of Earth's water is available for human use.
Fortunately, the hydrological cycle constantly renews the supply through rain and snow.
Despite the cycle, droughts, inadequate supplies and arid climates render many regions unfit for human use. Some of these regions are otherwise ideal except for their lack of usable water.
Fortunately, science has developed a solution: desalination. This water treatment method removes the salt from ocean water, turning it into fresh water. Techniques such as reverse osmosis and multi-stage flash distillation have made desalination economically viable in many regions.
As the world's population increases and droughts become more common, the desalination industry is here to stay. Australia has taken the lead in building desalination plants to guard against the threat of drought, spending more than $13 billion on such facilities. Israel and other Middle Eastern countries are also major users of desalination technologies. In fact, as of 2010, Israel boasted the world's largest desalination plant.
Closer to home, the Caribbean islands are often in need of usable fresh water. I've discovered an investment opportunity in a Caribbean desalination company.
Cayman Islands-based Consolidated Water Co. (Nasdaq: CWCO) develops and operates desalination plants and water distribution locations in the Caribbean and other regions around the world.
|Jebel Ali Desalination Station, Dubai|
Consolidated Water had a difficult third quarter, which sent CWCO down nearly 30% in the past month. However, this sell-off has created a powerful buying opportunity.
Net income declined during the quarter to just over $900,000, or $0.06 per diluted share. Revenue dropped 3% from the same quarter last year, to $15.4 million; retail water revenues fell 12%, to $5 million. However, over the past nine months, net income rose 34% from the same period last year, to just over $7.5 million. Gross profit climbed 8% during that time, to nearly $18 million.
The company blamed the poor third-quarter results on lower water sales in the retail segment, citing increased rainfall on Grand Cayman. However, Consolidated Water has several projects in the works that will likely benefit its bottom line, and the company's chief financial officer said its "financial condition at the end of the third quarter of 2013 remains very healthy."
In other words, the sell-off in CWCO isn't supported by the company's fundamentals -- it's an overreaction to a weaker-than-expected quarter.
Risks to Consider: Desalination plants are here to stay, but their success is related to a region's environmental conditions. Should an arid region turn into a wet one, the demand for desalinated water will fall. Be sure to use stop-loss orders and diversify properly when investing.
Action to Take --> Buying CWCO right now makes solid investing sense. The price has fallen to support at the 200-day simple moving average, which has created an ideal buying opportunity. Buying shares now with stops at $10.50 and a six-month target of $15 to $17 is a strong risk/reward proposition.