News Analysis date published New: 
Wednesday, July 18, 2012 - 13:00
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Wednesday, July 18, 2012 - 13:39
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Wednesday, July 18, 2012 - 13:00

My Bullish Call on Water Stocks Was Right -- Here's What's Next

Wednesday, July 18, 2012 1:00 PM

It's fun to be right, but as they say, too much of anything is still too much.

Take for instance my June 7 bullish call on water utility stocks. At the time, when few investors were interested in the group, the S&P 1500 Water Utility Index was valued at 818.73. It's up 10.3% since then, currently at 903.67. That's a big move for any industry, but it's huge for the water utility industry, especially considering the broad market is only up about 1% during the same timeframe.

Some would consider this strong move as proof that my original call was right, and start piling into my recommended pick of American States Water (NYSE: AWR) as a result. Or for the truly brave, my long-shot pick Connecticut Water Service Inc. (Nasdaq: CTWS) may finally look juicy.

I have to be honest, however. Taking on a water utility position now would likely be a big mistake.

Timing is everything
Don't get me wrong. I still love the water utility industry -- individual stocks as well as a group. But, the time to act was in early June -- before American Water Works Co. (NYSE: AWK) advanced 10% and before American States Water dished out the same-sized gain.

Now all these stocks are at short-term highs, looking at least like they're ready to take a break and possibly ready to backslide a bit as some investors take profits.

That being said, if you're kicking yourself over a missed opportunity, then don't.

While it's true that long-term investors usually don't have to worry about timing the market, it's not true that long-term entries and exits can't be tweaked. And if there were ever an opportunity for a tweak, then this would be it.

I can sum it up in six words: Long-term rally, short-term pullback.

See, though the stock prices went from undervalued to overvalued, the underlying corporate performance hasn't changed. American States Water is still on pace to grow its bottom line by 9.3% during the next three years, much like it has in each of the past three. Aqua America Inc. (NYSE: WTR) has been pumping up its bottom line by an average of 8% per year since 2008. American Water Works boasts more than a 9% growth rate in its earnings since 2008.

More reward than risk
How do they do it? It's just the nature of the business. Though they're not monopolies in the legal sense of the word, how many water companies can you buy water from? The answer for most everyone is "one." Although water rates are ultimately regulated by municipalities, those local governments have largely resigned themselves to moderate annual rate hikes from their utility providers.

In other words, considering how little risk water utilities face, the reward is quite attractive. All the stocks needed were a nudge out of their three-year rut, which is just what happened last month.

Risks to Consider: The same risk that was in place a month ago is still on the table: If the economy turns red hot, "risk" will be back en vogue and the safety of utility stocks will look more like a liability instead of an asset.

Action to take--> Right now, none -- that's the point. The time for interested buyers to act was a little over a month ago, or the next window of opportunity will be opening in the foreseeable future. With these stocks currently overbought and due for a dip in the short run, however, now's the worst time to start chasing performance.

Broadly speaking, I'd be a buyer once these stocks revisit the key moving average lines left behind late last month -- they'll be different for each stock. Though this is a bigger uptrend that could persist for years now that it's in motion, that doesn't mean you shouldn't try and squeeze a few extra nickels and dimes out of any trades.

James Brumley owns shares of WTR.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.