Potable and Unchartered Waters

Charles Payne
Posted: Mar 26, 2012 12:01 AM

Last week someone celebrated World Water Day, designated by the United Nations General Assembly, and first celebrated in 1993. The aim is to focus on the need for fresh water for the planet's seven billion inhabitants, which is soon to be 9 billion. The website mentions demand that includes the 2 to 4 liters the average human consumes each day, but also points out massive consumption of water on our dinner plates. For instance one kilo of beef consumes 15,000 liters of water while one kilo of wheat needs 1,500 liters. This is without a doubt a crisis brewing and that means investment opportunities can't be far behind.

I've been aware of the potential for water investment for years, and yet I can't remember a time when so many people were jumping on the bandwagon. One of the funny aspects of this is how many pundits keep saying the imminent water crisis is off everyone else's radar. Last November Joe Quinlan, Chief Investment Strategist at U.S. Trust, called the issue "The Great Untold Story." But Matthew Simmons wrote before his death in 2010 about the "far more inconvenient truths for water" where he urged immediate action. His piece pointed out that unlike fossil fuels there is no substitute for potable water.

Moreover, solutions such as desalination are hugely energy intensive, and already U.S. power generation uses 40% of our fresh water supply.

There is no doubt potable water will be a crisis one day, but how to make money from the crisis is the big question. According to the Business Insider the water sector has beaten the S&P 500 by 11% annually since 2001. So, it would seem this crisis that's still underreported has already exhibited stellar financial returns. But, I think we are just at the tip of the iceberg (pun not intended) as we haven't hit crunch time yet. The thing is what will spark the big move that lives up to the hype? I think supply (only 1% of planet supply is accessible drinking water) and demand dynamics will play a role in making this investment thesis a reality. But, a catalyst or spark for a giant might come from some other source.

First, I think messaging is going to increase awareness and drive investors into the space.
Second, I think a move by government could trigger a kind of hysteria that sees actual demand for clean water and associated investment vehicles increase.

A couple days ago I read the current issue of The Atlantic (that calls Ben Bernanke "the hero") and hit upon a full-page ad from Fidelity Investments. The ad was titled "Thinking Big ... An Ongoing Series Tackling Major World Issues" and zeroed on the fragile amount of drinkable water in the world. The ad end with these sentences:

We may have to desalinate the saltwater around us, too. The result could be massive economic, ecological and geopolitical shifts. Water is, after all, our most precious natural resource.

Wall Street smells a winner in water. Late last year Jeffries pointed out the 13 different ways to make money on water: municipalities, treatment chemicals, industrial, pumps, pipes, residential, filtration, distribution, irrigation, valves, bottled, desalination and disinfection. This kind of work from smart brokerage firms coupled with ads and videos from trusted investment companies will raise investor awareness.

Fear Motivation

According to a ranking of various types of motivations from Ken Shah and Professor Param J. Shah, the use of fear coerces a person to act against will. It is instantaneous and gets the job done quickly. They add that fear motivation is helpful in the short run. They rank fear as the seventh and maybe the least effective motivation technique, while Achievement Motivation is ranked first.

That brings me to the second source of demand for water stocks as an investment. I think government, especially this administration, will begin attacking certain industries in an attempt to further their own agenda. That means going after natural gas and oil drilling by touting fear about drinking water. Yesterday, in Cushing Oklahoma, President Obama defended his veto of the Keystone pipeline by saying the route in Nebraska threatened the water needs of two million Americans.

I would suspect in a second term such actions would be multiplied significantly as the war against business would enter into a death penalty phase.

One thing is for sure in the world of politics and Wall Street, and that is that it's hardly about the long term but a series of short-term moves, so for both the use of fear could provide the right spark.

There are ETFs in this space (PHO and PIO) that are worth looking at for those not ready to do much deeper homework. I also love Veolia (VE) which is my only stock idea in the February Monthly Newsletter where the ideas are designed to be held for a year, but this thing is on fire (If you'd like a free copy forward your name and phone number.). In addition, I think these are good long term water ideas:

* American Water Works (AWK)
* Pall Corp (PLL)
* Flowserve (FLS)

There is one thing to remember about these no-brainer thematic investments—they can take a while to work. I'm still waiting for Johnson and Johnson to buy St. Jude and for Medtronics to get back above $60.00 as both were great investment ideas based on the aging demographic. A lot of the obvious baby boomer stocks never did much, but names like Harley and Winnebago have benefited from their spending power and longer lives.

In this case, I think we will see emergencies real and (politically) engineered. With that in mind, it would be good to have some long term exposure in one of the names mentioned above.