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This past summer, I wrote about the difficulty with investing in water utilities -- their ability to turn a profit is very dependent on regulation, forcing many of them to issue increasing amounts of debt and new equity just to keep operating. But water utilities are not the only water-related investments. While it may sound like something out of a disaster movie, water is not as abundant as most people think, and it will become a solid investment as it becomes increasingly scarce.
Water, water, everywhere
Water is typically considered a nearly unlimited, renewable resource -- and in many ways, it is. About 70% of the planet is covered in water, and every schoolchild learns that water evaporates to form clouds, and then rains back down to start the process again. If that were all there is to it, investing in water would seem pretty silly.
Unfortunately, it's not as simple as it sounds. Only about 2.5% of the world's water is fresh water, the sort that life needs. Less than 1% of even that is actually available for use, while the rest is frozen in glaciers or buried too deep underground to access. Even the available water may not be easily accessible, as much of it is in inhospitable regions of northern Canada or the jungles of South America.
The harmless albatross
About a third of the world's population lives in an area with limited water availability, and that number will grow. The United Nations estimates that by 2050, agricultural output will need to double to keep up with population growth and increasing demand from emerging markets. Agriculture accounts for about 87% of global water use, so doubling output -- especially for thirsty crops like cotton and rice -- will put enormous strain on water use. Per capita availability in Asia has already declined by 40%-60% from 1955 to 1990.
All investments both great and small
Water infrastructure is one area that should see growth going forward. Less than two-thirds of the world has access to basic indoor plumbing, and water loss through old, leaky pipes can range from 30%-50% even in the developed world.
It will be necessary to build large amounts of water infrastructure to bring more people access to safe water and sanitation. Infrastructure consultant Tetra Tech (Nasdaq: TTEK ) is one company that will benefit, as well as actual manufacturers like Mueller Water Products (NYSE: MWA ) and Flowserve (NYSE: FLS ) .
Tetra Tech is especially interesting. The company helps commercial clients and national and local governments understand their infrastructure needs and form design plans. Because it doesn't do any of the actual building, the company is able to keep its costs fairly low and avoid heavy capital expenditures.
Water treatment technologies will also be important. Desalination can make seawater usable for drinking and other purposes, while other forms of water treatment make it possible to recycle wastewater, which is important in landlocked areas with limited water availability.
Two important companies in water treatment are Calgon Carbon (NYSE: CCC ) and Consolidated Water. Calgon is one of the world's largest manufacturers of activated carbon for water filtration and is also a leader in ultraviolet light disinfection technology. The company's products are used by hospitals, municipalities, and even the military. Consolidated Water runs desalination plants in the Caribbean, where freshwater is scarce. Unfortunately, it's a regional company, but pure plays in desalination are hard to come by.
Finally, an easier way to invest in water is through an ETF, such as the PowerShares Global Water Portfolio (NYSE: PIO ) . Since its inception, it has significantly underperformed its twin, the PowerShares Water Resources Portfolio. The two are mostly the same, but the latter ETF has significantly less international exposure, which helps explain the Global portfolio's underperformance, as investors have lately been seeking the relative safety of the dollar and domestic stocks. But to truly tap the world's need for clean water, an investor will need significant international exposure, and exposure to various segments of the water industry, which the Global Water Portfolio provides.
In order to gain the most exposure, I'm making an outperform CAPScall today on the PowerShares Global Water Portfolio. Add these companies to My Watchlist to follow along and see how water becomes an increasingly important commodity.