If you were pressed to single out the greatest challenge faced by mankind, what would it be? I expect most people would cite something related to water. Not only is it a growing concern, it’s an issue many investors are trying to position themselves to profit from.
Of course, individual perspectives would depend on where each of us lives. And I think most issues would fall into one of three buckets: issues arising from water scarcity; issues arising from too much water; and issues related to water quality.
Around 800 million people worldwide can talk from personal experience about water shortage as mankind’s greatest issue. That’s the current estimate of how many people are affected by water scarcity today.
A water resource expert living in central California – which is now in its fourth consecutive year of drought – would probably talk about lack of winter snowpack in the Sierras, which in turn is leading to water shortages for millions of Californians.
Many people living in rural Ethiopia – where far below 50% of the population has access to improved water supply – may talk about how they need to walk up to six miles every day just to get water, and often unpotable water at that.
Water shortage is one issue. Then there is the flip side, which is too much water.
For example, when Superstorm Sandy hit the Caribbean and the eastern seaboard in 2012, few people were worried about running out of water. Flooding, mudslides and storm surge are just a few of the issues people deal with every day across the world resulting from excess water.
There are also issues of water quality resulting from both water shortages and flooding. Around 840,000 people die each year due to water-related diseases.
A homeowner in the northeast U.S. might talk about how iron and magnesium concentrations in well water is ruining water fixtures throughout the house and causing digestion issues.
In New Delhi, India – where 103.8 million people lack safe drinking water – the issue may be that there is no well to begin with, or no adequate filtration system for the wells that do exist.
There are myriad other water issues too. Transport and distribution is a challenge, since water pipes are constantly breaking due to shifting ground. And if transportation issues could be solved, it would be far easier to solve water scarcity, quality and flooding issues.
The bottom line is that regardless of where you live there is bound to be a water-related issue. And solutions are often hard to come by, given the complexity of natural systems and the infrastructure required to collect, transport and purify water.
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While water conservation is an obvious solution in many cases where water shortages exist, conservation alone doesn’t cut it. Using less water in New England doesn’t help the 358 million without access to water in Africa.
In Bangladesh, water scarcity has been a long-term challenge. Part of the solution was to drill 4 million wells in the late 1970s. But in the early 1990s many of these wells were found to contain dangerous levels of arsenic, creating health issues for those that drank the water.
People living in Bangladesh today need more than just conservation – they need new infrastructure and purification, too.
For all of these reasons, and more, water-related investments are a popular theme. Given that water is necessary to sustain life, and that too much water can snuff it out, there are bound to be almost limitless investment options for profit-seekers, socially responsible investors and just about any other motivating force.
At least that’s how the thinking often goes. But the truth is that solid investment options are limited when it comes to water.
Bringing water to the millions of people around the world who need it (or bringing them to the water) isn’t always the place to look for profits.
In many places this is the domain of microlending, fundraising, volunteer work and public infrastructure projects. The challenges are often just too big, and the investments too significant, for for-profit companies to provide the only solutions.
That said, great water stocks do exist. As a starting point, it’s good to determine first if you’re looking for a growth-oriented company, or an income-oriented one.
Plenty of infrastructure companies exist. And there are some good options for investment here, but they’re generally not attractive to growth investors. They’re more apt to be dividend-paying engineering and construction firms.
Water utilities are a clear way to play the water trend. But again, these aren’t going to be growth-related investments.
Cutting-edge water-related technology companies often seem extremely enticing. But too often these companies don’t pan out. And those technologies that are credible are often a small slice of a much larger business.
There are some attractive life-science companies that represent a way for growth investors to participate in water-themed trends. But many of these companies only have a small fraction of their revenue attributed to water-related products and services.
So where does that leave us as growth investors looking to participate in the world’s ever-present need for water?
A Pure-Play Growth Opportunity
Based on my research, there is only one type of growth-oriented company that I really like for pure-play water-related exposure. These are industrial manufacturing firms: the makers of pipes, pumps, filters, purifiers, water heaters, boilers, fans and so on.
My reasoning is simple. Good growth-oriented water-related businesses that are suitable for investment require long-term demand from a reliable user base. The industrial companies fit this to a T.
In both developed and developing economies these companies provide businesses, consumers and utilities with much of the equipment that pulls, pushes, pumps, heats, cools, filters and monitors water.
Water can’t get from point A to point B without their equipment. And it can’t be transformed into a more usable state – i.e., for heating, air conditioning, drinking, etc. – without this equipment either.
In developed economies, including the U.S. and Europe, advancements in technology will continue to support upgrades of industrial water equipment as conservation practices become increasingly important. There is a steady consumables business from wearable parts, and growth will come during periods of economic expansion too.
And in developing economies, especially China and India, there is a massive user base that is increasingly able to afford investments in water-related equipment. This creates a growth opportunity for many industrial water-related companies.
At some point there will be opportunities for industrial water-equipment companies in frontier markets where too many people are suffering from lack of water. But from what I understand, the immediate need in most of these areas is to simply get water to people by any means necessary.
So growth investors should remain focused on industrial manufacturers in the developed and developing economies of the world. I’ve looked at a lot of companies that make water-related equipment. And my favorite growth-oriented name is a buy right now. You can get all of the details here.