No Dry Well at American Water Works

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to fives, helps you focus your attention by providing you with a personalized "Stock of the Day." Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours as well as industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my having weighed in on utilities like Veolia Environnement (VEOEY 0.16%) that I rated to outperform the broad indexes and Duke Energy (DUK -0.95%), which I saw underperforming, the CAPS supercomputer thought I also might be interested in automaker American Water Works (AWK 0.04%). It was one of five "Stocks of the Day" it offered up for my consideration this week along with restaurant operator Luby's (LUB), natural gas specialist DCP Midstream Partners (DCP), railcar manufacturer FreightCar America (RAIL 0.84%), and integrated oil and gas producer Sasol (SSL 1.24%).

Even though the water utility has a virtual recession-proof business model, just remember, as smart as the CAPS algorithm may be, it's still just an algorithm. So be sure to look before you leap on any of its suggestions.

American Water Works snapshot

Source: FinViz.com

Long, hot summer
Slaking your thirst for a dependable investment ought to lead you to tap into American Water Works, the largest publicly traded water and wastewater treatment company in the U.S. More than 40% of revenues from its regulated operations come from New Jersey and Pennsylvania. In the third quarter regulated revenues rose 10% as demand rose because of the higher than normal temperatures its customers experienced this past summer, adding $0.13-$0.16 per share over the first nine months of the year.

It also offers market-based businesses that account for around 12% of total operating revenues, which include running wastewater treatment facilities for the military and municipalities, service repairs businesses for sewer lines, and hauling biosolid waste.

Water, water everywhere
There's an investing maxim to "buy what the king is selling," suggesting it's a good investment opportunity when government privatizes an industry. But it could equally apply to utilities where the government grants a business a territory that no one can easily move in on.

As a regulated utility, it's not like anyone can just come in and open up shop next door to you, so American Water Works has a wide moat protecting it. Only when it wants to acquire another business does it run into Aqua America (WTRG -0.27%), American States Water Resources (AWR 0.36%), or California Water Service Group (CWT 0.27%). France's Suez Environmental, which owns my own local utility, United Water, is a rival as well when competing for new business.

Drink up!
Wall Street is unanimous in its belief that it will continue to outperform the broad indexes. At 17 times earnings and estimates, it offers a valuation that is right in line with other utilities though its dividend yield is on the low side. Considering that analysts are looking for steady 10% growth from this dependable performer, and considering the likelihood of continuing to have warmer than normal temperatures, American Water Works would be an investment that ought to never run dry.