Talk about liquid assets. As climate change coincides with population growth around the world, water for drinking, sanitation and agriculture is becoming more scarce.
Where there is scarcity, Wall Street is bound to figure out a way to make a buck, and there are multiple ways to invest in water, including through utilities, metering, infrastructure and desalination companies.
Fortune Business Insights projects that the global water and wastewater treatment market will grow from $323.3 billion this year to $536.4 billion by 2030.
[Sign up for stock news with our Invested newsletter.]
In the U.S., water infrastructure is aging, and public companies that invest in upgrades can then expect to recoup that along with profits. Meanwhile, consolidation in a nation with thousands of separate water systems will result in economies of scale, saving customers money and enabling the buyers to expand their customer bases.
“Despite its apparent abundance, fresh water is a scarce and finite resource,” according to Global X, which offers the Clean Water ETF (ticker: AQWA). “As the global population grows, investment in clean water technologies may be essential to sustaining and improving standards of living.”
Here is a look at seven water stocks and exchange-traded funds, or ETFs, to consider this year:
| Stock or ETF | YTD performance as of Sept. 12 |
| American Water Works Co. Inc. (AWK) | -8.5% |
| Essential Utilities Inc. (WTRG) | -19.9% |
| Global Water Resources Inc. (GWRS) | -15.4% |
| Consolidated Water Co. Ltd. (CWCO) | 107% |
| Xylem Inc. (XYL) | -11.8% |
| Invesco Water Resources ETF (PHO) | 6.4% |
| First Trust Water ETF (FIW) | 8.5% |
American Water Works Co. Inc. (AWK)
As the largest listed water and wastewater utility, American Water Works provides those services to more than 14 million people, with regulated operations in 14 states and on 18 military installations.
In addition to providing services to residences, public buildings, and commercial and industrial businesses — regardless of what the economy is doing — the company’s long-term military contracts also provide stability.
With a market capitalization of around $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.
Although rising interest rates will increase project expenses, Zack’s Investment Research is projecting increasing revenues for the period of 2023 to 2025.
“American Water Works is gaining from … new water systems and military contracts,” the research firm says. “Investments to upgrade its infrastructure will allow the company to provide quality services to its expanding customer base.”
Essential Utilities Inc. (WTRG)
Essential Utilities operates similar water and wastewater infrastructure to American Water Works, but it also has natural gas-related services in the U.S.
Its water and wastewater business serves more than 3 million people in eight states. Meanwhile, the company’s energy unit provides natural gas service to about 740,000 customers 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 with natural gas.
“Consolidation is the need of the hour in the fragmented U.S. water utility space,” Zacks says. “In the United States, the majority of water and wastewater services are provided by municipalities, and Essential Utilities is actively exploring opportunities to expand utility operations through the acquisition of municipal assets.”
Global Water Resources Inc. (GWRS)
This pure-play water resource management company owns and operates 29 systems that provide water, wastewater and recycled water services, primarily around metropolitan Phoenix.
Global Water Resources recycles more than 1 billion gallons of water each year and distributes recycled water. That capability and its active mergers-and-acquisitions program may bode well for the company, as developers of new subdivisions in the Phoenix area will have to turn to recycled or imported water in addition to that supplied by underground water. This summer, Arizona announced new groundwater rules for developers of new subdivisions in the Phoenix area in an effort to forestall a shortfall over the next 100 years in the state.
Most of Global Water Resources’ revenue comes from residential customers. In the second quarter, residential customers from its water services unit brought in $4.5 million in sales out of $6.6 million, while residential customers in its wastewater and recycled unit brought in $5.6 million out of $6.4 million.
For a water company so dependent on the residential housing market, interest rates offer extra risk. For one thing, higher rates put a dent in home buying. For another, higher rates make borrowing to fund organic expansion more costly.
“While our service areas experienced a notable slowdown in new housing starts over the last year due to higher interest rates, we have begun to experience a rebound in 2023,” CEO Ron Fleming said in a press release accompanying the results. “We anticipate further service connection growth due to the region’s continued population and job growth, which is expected to drive continued expansion in multifamily housing and large-scale commercial, recreational and industrial projects.”
Consolidated Water Co. Ltd. (CWCO)
This seawater desalination company has a water utility that supplies drinking water to two of the three most populated areas on Grand Cayman Island. It has long-term contracts with government utilities in the Cayman Islands, the Bahamas and the British Virgin Islands, giving it exposure to the tourism industry in the Caribbean.
In addition to water-related products, the company also designs, constructs, sells, operates and manages water infrastructure.
Zack’s expects the company’s revenue to rise nearly 60% this year because of improving tourist activity and increased demand.
“The company, which primarily funds its investment through equity issuance, has hardly had any long-term debt (on its) balance sheet over the past few years,” Zack’s says.
Xylem Inc. (XYL)
In May, Xylem completed a $7.5 billion acquisition of water treatment company Evoqua, giving Xylem greater scale, with the company saying it is now the world’s largest pure-play water technology company.
“Global awareness of water as a systemic risk to society has never been greater,” Xylem CEO Patrick Decker said in the press release announcing completion of the acquisition. “Investment in water solutions continues to accelerate as communities and businesses around the world address intensifying challenges like water scarcity, quality and resilience to climate change — and how to address these issues in an affordable way.”
Named for the plant tissue that transports water and nutrients up from the soil, the $23 billion water solutions provider is forecasting 2023 revenue of about $7.2 billion and adjusted earnings per share of $3.50 to $3.70, an increase from its previous outlook of $3.15 to $3.35.
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 is that an ETF probably won’t outperform a single stock that is surging.
This leading water ETF invests in companies that create products that conserve and purify water for homes, businesses and industries.
The fund has a five-star rating from Morningstar, which says its “portfolio maintains a cost advantage over competitors, priced within the second-cheapest fee quintile among peers.”
PHO has an expense ratio of 0.59%, or $59 in annual fees on an investment of $10,000.
First Trust Water ETF (FIW)
This well-established water ETF also has a five-star rating from Morningstar, but it’s slightly cheaper, with a 0.53% expense ratio. It tracks an index of companies that derive a substantial portion of their revenues from the potable and wastewater industry.
FIW contains a healthy allotment of utilities, which are generally considered defensive plays. When growth stocks like tech companies are going gangbusters and investors have lots of risk appetite, these companies aren’t going to perform as well.
But investors will appreciate their steadying effect during an economic downturn. After all, people are going to need to drink water and take showers regardless of what the economy is doing.
More from U.S. News
7 Best Solar Stocks to Buy Now
7 Best Oil and Gas Stocks to Buy Now
7 Best Green Hydrogen Stocks and ETFs to Buy Now
7 Best Water Stocks and ETFs to Buy in 2023 originally appeared on usnews.com
Update 09/13/23: This story was published at an earlier date and has been updated with new information.
