Special Report: Investing in Water, the World's Most Vital Resource

Seemingly simple and boring, water is so easy to take for granted. But it is essential to life on this planet.

Every man, woman, and child would kill for it if needed.

However, most investors haven't yet taken advantage of water as the ideal investment opportunity...

Perhaps it sounds too common to be lucrative?

Don't be fooled by the fact that 70% of the earth's surface is covered in water...

That doesn't represent the amount we actually have at our disposal for everyday use. Roughly 97% of Earth's water is saltwater, leaving only 1% for human use and consumption.

And we've really been stretching that 1% pretty thin in the last few decades...

Increases in industrialization and agricultural use have led to dangerous water shortages in regions across the globe. Extreme drought conditions worldwide have resulted in farmers using more and more water in agriculture.

In addition to taking millions of lives prematurely in third-world countries, these global water shortages are quickly impacting industrialization projects and taking a toll on the average family budget.

The American Society of Civil Engineers has said water infrastructure will cost at least $1 trillion in the U.S. alone. Meanwhile, the nation's drinking water and wastewater infrastructure is in poor shape. Demand for advanced systems to provide clean water is rising here... and everywhere.

As the laws of supply and demand always state, when something becomes scarce, its value explodes.

Water is no exception. And as world population grows, water consumption will follow suit.

This is a pretty basic formula for all resources; however, there are virtually zero variables when it comes to water, something vital to our survival.

The increasing price of water stocks over the past few years more explicitly reveals the impact of water consumption trends on water prices.

Consumer trends regarding water follow a unique path...

Why Invest?

People the world over — especially those of us living relatively comfortably in developed countries — tend to take water for granted. We naively overlook the water scarcity crisis.

The truth is, we can't afford to overlook the facts:

  • 780 million people lack access to clean water.

  • 3.4 million people die annually from a water-related disease.

  • More people have a mobile phone than a toilet.

  • Every 21 seconds, a child dies from a water-related illness.

  • 443 million school days are lost each year due to water-related illness.

  • Lack of community involvement causes 50% of all water projects to fail.

  • People living in informal settlements (i.e. slums) often pay 5x to 10x more per liter of water than wealthy people living in the same city.

Economic water scarcity is an alarming issue caused by a lack of investment in water, or insufficient human capacity to satisfy the demand for water. Symptoms of economic water scarcity include a lack of infrastructure, with people often having to fetch water from rivers for domestic and agricultural uses.

The good news is investment in safe drinking water and sanitation contributes to economic growth. For each $1 invested, the World Health Organization (WHO) estimates returns of $3-$34, depending on the region and technology.

As this issue gains attention and international focus, the water sector is poised make big waves, and this will have a strong ripple effect on the global economy at large. Once the world recognizes this humanitarian crisis for what it really is, progression has the potential to turn the industry into one of the most lucrative in history.

Right now, the water industry is already a $500 billion market, and it's only expected to go up from there thanks to the numerous infrastructure projects necessary within the next two decades.

It is estimated that at least $662 billion will be required for water infrastructure rebuilding over the next 20 years. But the EPA estimates that between 2000 and 2019, funding to address water infrastructure needs will likely fall short by as much as $263 billion or even more as demand for water surges.

Such a shortfall is nothing to leap for joy over. But the underlying opportunity masked by this disaster is something investors should be getting genuinely excited about.

The Growth of Desalination

In addition to direly needed capital expenditure on basic water infrastructure, we'll still need to find a way to secure greater amounts of fresh water to meet industrial, electrical, agricultural, sanitation and human needs.

Just look at the long-term drought in California and the Southwest. Lake Mead is tapped out. The mighty Colorado River dwindles and dries out before it reaches the sea.

Farmers in one of America's most productive agricultural areas are pitted against city-dwellers over who is entitled to what little is left.

And just to the west, the world's largest ocean sits virtually untapped and completely useless due to the salt in it.

This is not unique. Situations like this exist around the world, and will get worse.

Water desalination has not been widely adopted thus far, due to prohibitively high construction and electricity costs.

But when the fresh water is gone, the only other option is to let crops wither and suffer through famine, and face massive economic losses and disruption as people flee parched cities.

The price of water will rise and eventually make desalination cost-competitive. When push comes to shove, people will pay whatever it takes for a fundamental necessity.

This has already happened in the Middle East where 75% of water comes from seawater desalination.

There are two ways to make salt water useful: flash distillation involving boiling water at low pressures, and reverse osmosis using water forced through membranes.

A majority of desalination capacity is flash distillation, but membrane technologies use far less energy and account for the majority of new facilities.

According to the International Desalination Association, the amount of new desalination capacity that came online during 2013 is 50% more than in 2012.

Yet total desalination accounts for only 80 million cubic meters per day, or about 1% of estimated global consumption. 45% of the world population lives within 150 kilometers of an ocean or sea.

As scarcity mounts and costs continue to fall, you can bet the use of desalination will continue to surge.

There is a lot of market share yet to capture. And a lot of money to be made.

Ways to Invest

Entrepreneurs with Vestergaard Frandsen have developed a handy little product know as the LifeStraw.

This unique tool was brilliantly designed to filter water for "prevention of common diarrheal disease; it can be carried around for easy access to safe and clean drinking water." The instant microbiological water purifier is advertised as being able to remove 99.999999% of waterborne bacteria, with the ability to filter up to 1000L of water.

Companies and products like Vestergaard Frandsen and its LifeStraw are likely to explode in the months and years to come, as the water crisis spirals exponentially out of control.

Utility investing may very well mark the next biggest bull run of this generation, with water winning the race to the top.

If you're searching for the next emerging market, the answer is as clear as clean water...

American States Water (AWR) is part of the S&P 500 Water Utilities Index. Here are a few popular stocks under other indexes:

  • Dow Jones U.S. Water Index: This index encompasses approximately 29 stocks, both national and international.

  • Palisades Water Index: Palisades Indexes LLC has indices designed for Exchange-Traded Funds (ETFs) "and for the structured or derivative product markets." Its mission statement is as follows: "Our aim is to create indexes where there are strong fundamentals and superior performance for investors. One of our specific services is to provide our clients with the knowledge and support of our industry experts. Our capabilities span to providing indexes calculated around the clock in many countries and in any currency for use as a benchmark."

  • ISE-B&S Water Index: There are over 35 water-related stocks in this index launched in January of 2006. The index is comprised of companies active in water distribution, water filtration, flow technology, and almost every other type of water solution.

  • Aqua America (WTR): This company services 2.8 million residential customers and provides water to homes, offices, and industrial customers throughout 14 states. Throughout the past few years of economic hardship, Aqua America noted there was essentially no decline in the demand for water. The only competition it has includes a handful of other water utility conglomerates, like American Water Works Company (AWK), and some privately held companies, like United Water and Utilities, Inc.

Another simple option if you're considering investing in water stocks is to do so through the PowerShares Global Water Fund (PIO).

This is another ETF that uses the Nasdaq OMX Global Water Index as a benchmark in order to track companies that are working on various products that help households, businesses, and industries conserve and purify their water supply.

As for investing in companies involved with desalination, most of the action is in large-cap companies. General Electric (NYSE:GE) is heavily involved, along with other massive industrial conglomerates.

You'll want to consider out some of the large international water engineering firms for more exposure. This will give you access not only to desalination, but also to the broader emerging theme of water scarcity.

Veolia (NYSE: VE), Consolidated Water (NASDAQ: CWCO), and even Tetra Tech (NASDAQ: TTEK) are companies to watch on that front.

So take your pick, and rest assured that your portfolio is well hydrated.


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