They say water is life. For Wall Street, water is money.
As climate change warms the earth and makes droughts more intense, how humans manage water will only become more important.
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Even without that urgency, the investment case is strong for publicly traded water companies such as water and wastewater utilities, firms that make flow-control devices, and even technology and chemicals companies that play a role in sanitization services.
The nation’s water infrastructure is aging and needs lots of investment. Public companies that make the investment can then expect to recoup it along with profits.
“One of the driving growth theses for water to grow earnings is to invest in water infrastructure and earn attractive returns,” says Timothy Winter, portfolio manager with Gabelli Funds. “We have everything from lead to older wood pipes; so that’s something that must be addressed because of the implication of what gets into the water.”
At the same time, the public wants cheaper water and wastewater services.
To make that happen, economies of scale are necessary, but there are currently thousands of separate water systems in the U.S., most of them run by municipalities, Winter notes.
“The private companies, just by their very nature, are more efficient, and they are able to attract better expertise,” Winter says. “By consolidating and creating efficiencies, we can lower the price of water.”
Eric Kuby, chief investment officer with North Star Investment Management, expects that water utility growth will outpace that of electric and gas utilities because of water companies’ regional monopolization of the supply chain.
Also, people aren’t likely to curtail their demand for water much, compared with other types of utilities, because of the vital nature of the resource and because water expenses represent a small portion of household spending, Kuby says.
“This allows for significant price increases in an industry that is consolidating with several multistate consolidators,” he says.
With that backdrop, here’s a look at seven top publicly traded water stocks and exchange-traded funds, or ETFs:
— American Water Works Co. Inc. (ticker: AWK)
— Essential Utilities Inc. (WTRG)
— Global Water Resources Inc. (GWRS)
— Xylem Inc. (XYL)
— Invesco Water Resources ETF (PHO)
— First Trust Water ETF (FIW)
— Invesco S&P Global Water ETF (CGW)
American Water Works Co. Inc. (AWK)
One of Winter’s top picks is American Water Works. As the largest water utility company in the U.S., it provides drinking water and wastewater services to roughly 14 million people in 24 states. With a market capitalization of about $27 billion, the company is one of the largest of any type of utility stock and is bigger than some of the better-known electricity providers.
It has grown thanks to a focus on aggressive acquisitions but also has unrivaled stability because of multi-decade contracts with U.S. military bases.
“If you look at their track record, AWK has grown earnings for the past 13 years at 9% to 10% with investment grade for a low-risk business model, and they do it by making acquisitions of smaller systems and investing in infrastructure,” Winter says.
Essential Utilities Inc. (WTRG)
Another top pick of Winter’s is Essential Utilities, which operates similar water and wastewater infrastructure to American Water Works but also has natural gas-related services in the U.S. for more diversification.
It provides water and wastewater services to more than 3 million people in eight states.
“When it comes to water and wastewater infrastructure, the reality is that the United States has more than 1 million miles of underground pipe, much of which is nearly a century old and in dire need of replacement,” the company says.
Meanwhile, the company’s energy unit provides natural gas service to about 750,000 homes and businesses in Pennsylvania, West Virginia and Kentucky.
This layer of diversification dilutes what would otherwise be a direct play on water, but that may be appealing to some investors who want to hedge their bets a bit.
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Global Water Resources Inc. (GWRS)
Kuby’s top water stock pick is Global Water Resources, which operates and manages water, wastewater and recycled water utilities in Arizona. It also distributes recycled water.
The company owns and operates 29 systems that provide water, wastewater and recycled water services, primarily in growth corridors around metropolitan Phoenix.
“We think that the demographics of their regional hub, the Phoenix metro area, represent an excellent growth opportunity,” Kuby says. “The region has above-average population growth that will allow their consumer base to rapidly expand as the population moves further out of the city center where GWRS has adequate access to aquifers to meet expected demand.”
Xylem Inc. (XYL)
Named for the plant tissue that transports water and nutrients up from the soil, the $18 billion water solutions provider Xylem focuses on valves, pumps and flow-control devices.
For 2023, the company is forecasting revenue of $5.7 billion to $5.8 billion, up 3% to 5% on a reported basis and up 4% to 6% on an organic basis. It is expecting adjusted earnings per share of $3 to $3.25, an increase of 5% to 14% over 2022 adjusted results.
That guidance doesn’t include the company’s planned $7.5 billion acquisition of water treatment company Evoqua Water Technologies Corp. (AQUA), which is expected to close in the middle of the year.
Invesco Water Resources ETF (PHO)
For those who prefer a one-stop shop instead of picking individual stocks, ETFs offer a diversified way to play the broader water trend in a single holding. The downside to that diversification is that ETFs probably won’t perform as well as a single stock that is majorly outperforming.
This leading water ETF has a five-star rating from investment research firm Morningstar and an expense ratio of 0.59%, or $59 in annual fees on an investment of $10,000.
The largest industry allocation in the fund is machinery, at about 26%, followed by water utilities at about 17%.
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First Trust Water ETF (FIW)
This well-established water ETF also contains a healthy allotment of utilities, with that sector making up about 17% of the fund, the second-biggest after industrials at nearly 55%.
The exposure of these funds to the utilities sector is important because utilities are generally considered defensive plays.
They probably won’t light up the board with green compared with tech stocks during bull markets. But in times of uncertainty or economic downturn, they can offer some stability to portfolios because people need their services — such as drinking water — regardless of what the economy is doing.
The utilities sector was down only about 3% over the past year through the end of February, while the broader market as measured by the S&P 500 was down about 8% over that time.
First Trust Water ETF has an expense ratio of 0.53%.
Invesco S&P Global Water ETF (CGW)
Another Invesco fund of note, this water ETF takes a more international approach by including water stocks from global markets instead of just U.S. corporations.
More than half of this ETF is still allocated to the U.S. But it rounds out its top five geographies with the U.K., Switzerland, Japan and France.
The fund, which has an expense ratio of 0.57%, is more than 40% allocated to utilities, its second-biggest sector allocation after industrials.
The industrials sector has been doing pretty well over the past year. It was up about 3% through the end of February compared with the S&P 500’s decline, and all three of these water ETFs have significant exposure to the industrials and utilities sectors.
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7 Best Water Stocks and ETFs to Buy originally appeared on usnews.com
Update 03/08/23: This story was previously published at an earlier date and has been updated with new information.
