The Business of Water
As idle as a painted ship, upon a painted ocean
Water, water, everywhere, and all the boards did shrink;
Water, water, everywhere, nor any drop to drink."
Excerpt from - The Rime of the Ancient Mariner
Samuel Taylor Coleridge, 1797-98
The scenario in Samuel Coleridge's 18th century poem is precisely what governments the world over are hoping to avoid, a lack of consumable water. While more than 70% of earth is covered by water, less than 1% of the global supply is readily available, and safe to drink. To make things more interesting, global populations are growing at unprecedented rates, especially here in China and places like India.
The other day I made the case that oil is going to appreciate because it is a scarce resource, and that therefore oil and gas-exploration companies were a good long-term investment. Of course, as always, a good entry price is critical.
The same case can be made for water. And the companies that treat water to make it safe to drink, and safe to dispose of, are compelling investments. In fact, depending upon your perspective, the case for water could even be stronger. While I could get by for a while without oil, I haven't got a shot without water.
Water demand is growing for use in agriculture, industry, cooking, energy production - the list goes on and on. And we use a lot of it. While you may only drink half a gallon a day, you used around 25 gallons during your last shower. And it takes 1,857 gallons to produce a pound of beef.
In my world, this growing demand for water means looking for small-cap companies that can alleviate the problem, and investing in the best ones. Just yesterday, I recommended a Chinese water stock to subscribers of my SmallCapInvestor PRO advisory service. That stock is poised to increase by more than 50% on growing demand for its suite of water treatment products.
If you were to read Samuel Coleridge's entire poem, you would follow the tale of a mariner who has returned from a long adventure at sea. Despite the abundance of water, the ship's crew has no method by which to remove the salt and make the water potable.
Thankfully, technology has advanced considerably in the last 210 years. Today, the desalination process removes solids like salt and other contaminants from seawater and makes it safe to drink. It is a burgeoning industry of $30 billion today, and according to FORTUNE Magazine, it will double by 2016.
The next generation of H20 desalination plants are gearing up for increasing demand from industry and agriculture. And millions of people living in vulnerable areas - The Middle East, Africa, and China in particular - look to their governments to help.
What I find amazing about the water industry is that the cost of desalinating water is decreasing and converging with the cost of simply getting fresh water. It's very expensive to build the infrastructure needed to transport fresh water for large numbers of people. The stock I recommended to my subscribers has support from the Chinese government, both to bring clean water in, and to make sure clean water goes out.
Wastewater treatment is a growing concern for agriculture, as well. The increase in organic fertilizer use is a direct response to the negative impact that nitrogen based fertilizer has on water supplies. I also have a favorite organic fertilizer company in China, in SmallCapInvestor PRO.
While there are a number of large diversified companies in the space, including General Electric (NYSE:GE), and Veolia Environnement (NYSE:VE), I prefer to look at the small-cap pure-plays for water treatment and desalination.
A few of these include Energy Recovery (Nasdaq:ERII), Consolidated Water (Nasdaq:CWCO), and Nalco (NYSE:NLC). Last week, Energy Recovery ranked in the Top 150 Fastest Growing Companies in North America on Deloitte's 2009 Technology Fast 500. The CEO said that the company has grown more than 40-fold in the last seven years.
Consolidated water is based in the Cayman Islands and specializes in reverse osmosis for desalination. But I don't like it; stock is underperforming others in the sector.
Nalco is a domestic company and just reported better than expected Q3 profit. The CEO sees Asia sales picking up over the next several years. His forecasts support my move to invest directly in China.
As I mentioned yesterday, the market is starting to show better entry points for small-cap stocks that investors can hold for the duration. Finding a scarce-resource play, like water, can result in handsome returns.
About the Author
Ian Wyatt is a co-founder and President of Business Financial Publishing and the Chief Investment Strategist and Publisher of SmallCapInvestor.com and SmallCapInvestor.com PRO.
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