7 Best Water Stocks to Buy Now

Water stocks are an interesting breed. The majority of the world’s water is full of salt, frozen within snow or glaciers, or is contaminated or otherwise not fit for human consumption.

The industry to convert water into a product fit for human consumption is quite a large one, and there are a lot of different ways to get exposure to the sector. These include but are not limited to industrial plays, water utilities and firms focus on efficiency.

There are good arguments for getting exposure to water stocks across the industry. These seven water stocks give investors a variety of ways to benefit as we spend more money securing this most precious resource.

PNR Pentair $42.40
XYL Xylem $105.54
VMI Valmont Industries $321.07
ECL Ecolab $142.98
AWK American Water Works $141.84
WTRG Essential Utilities  $44.14
GWRS Global Water Resources $12.46

Pentair (PNR)

Pentair (NYSE:PNR) is a worldwide leader in water filtration, with operations in more than dozen countries. The firm offers industrial filtering, pumps, and flow solutions. it also has a swimming pool business, where it makes pool equipment and filters.

The swimming pool business positively blasted off in popularity during the pandemic as people sought new ways to have fun and exercise at home. Understandably, investors are now concerned that swimming pool installations will plunge after 2021’s record run. That probably will happen.

However, investors shouldn’t write off Pentair as simply a cyclical play on leisure dollars. The industrial business is a powerful one and is far less impacted by economic cycles. The need for clean water isn’t going anywhere, and Pentair will enjoy rising long-term demand in that market regardless of near-term swings in the pool business.

PNR stock has dropped by more than 40% over the past year, pushing shares down to just 12 times forward earnings and making it one of the more affordable water stocks to buy.

Xylem (XYL)

Xylem (NYSE:XYL) is a major player in the water infrastructure space. Instead of serving one niche, Xylem has built out a broad platform, aiming to be a one-stop shop for water equipment needs.

Xylem supplies water measurement, infrastructure, storage, testing, and efficiency equipment among other goods.

The basic idea is that a customer such as a water utility can buy everything it needs from Xylem instead of having to go a variety of different vendors for each product. This creates efficiencies of scale with sales and marketing.

XYL stock tends to always be expensive, and that remains the case today. Shares were down more than 25% for the year at one point but have rebounded in recent weeks.

That rally has picked up steam as the company’s recently announced Q3 earnings easily topped expectations and the company boosted guidance significantly.

Unfortunately, shares are now going for more than 35 times forward earnings. However, if you want the leading water infrastructure company, Xylem is one of the best water stocks to own, and its past track record has been strong enough to justify paying a premium valuation for shares.

Valmont Industries (VMI)

Valmont Industries (NYSE:VMI) is a little-known industrial conglomerate. Shares have produced a more than 3,000% gain over the past 30 years, with shares rising from $9 in 1992 to more than $320 today. Often niche players such as Valmont are able to put up surprisingly robust and long-lived outperformance.

What has powered Valmont’s tremendous performance? It owns a variety of businesses. One primary one is in making fabricated poles for uses such as traffic, lighting, and cell phone towers. Another key division relates to water; Valmont makes a good deal of mechanical irrigation equipment and related water management solutions and technology.

This is a key area of interest given geopolitical developments over the past year. Ukraine and Russia are both major grain producers, and it seems likely the ongoing war will greatly impact harvests from that region.

As a result, the world needs to maximize its grain production from other leading agricultural zones. Valmont should see healthy demand for irrigation systems as a result.

Ecolab (ECL)

Ecolab (NYSE:ECL) is the world’s largest provider of sanitation, hygiene and water treatment services globally. The company generated almost five times as much revenue as its closest rival, Diversey (NASDAQ:DSEY), last year.

The company’s appeal is simple. A large consumer firm such as a fast food chain, cruise ship operator, or multinational hotel group takes out an all-in-one contract with Ecolab. Ecolab can provide that client with pest control, surface cleaning, specialty chemicals, and water treatment and efficiency.

By contrast, that same restaurant or hotel would have to hire a bunch of different companies to provide those tasks on an individual basis. Ecolab’s focus on delivering water-saving solutions to customers has been particularly attractive as clients focus on reducing their ecological footprints while saving money.

Ecolab’s business is heavily exposed to consumer discretionary spending. Thus, the pandemic crushed the business as many restaurants, hotels, airports and so on temporarily shut down. Now, however, as the world economy has reopened, business has come roaring back.

Earnings are back up as the company has reported double-digit revenue growth again. That said, ECL stock is still far below its highs as investors worry about inflation and supply chain pressures on the company’s margins.

Given Ecolab’s dominant market position, however, its only a matter of time until Ecolab shares return to their pre-pandemic levels.

American Water Works (AWK)

There are a fairly large number of publicly traded American power utilities. For whatever reason, however, water utilities are much more likely to be held privately or by local governments.

As a result, there are fewer than a dozen sizable publicly-traded water utility stocks in the United States today. Of these, American Water Works (NYSE:AWK) is among the largest. It provides water and wastewater services to more than 1,700 towns and municipalities across 14 states.

Generally, water utilities, including AWK stock, have been rather expensive. American Water Works shares have traded as high as 40 times earnings at some points.

With the current bear market, things have gotten a bit more reasonable. AWK stock is down more than 20% year-to-date, pushing the forward P/E ratio to 32. That might still seem expensive.

However, it’s actually not bad for a company as consistent as American Water Works. Year in and year out, the company has higher revenues, higher profits, and raises its dividend. That consistency is worth a lot, especially in uncertain times such as the present.

Essential Utilities (WTRG)

Essential Utilities (NYSE:WTRG) is another large water utility. Until 2020, it was Aqua America and was a pureplay water operation. At that time, however, it bought People’s Gas which diversified the business. Regardless the gas unit is smaller than the prior Aqua America operations.

The combined firm offers investors the promise of tremendous stability. Essential Utilities is a Dividend Aristocrat, meaning that it has increased its dividend for at least 25 consecutive years. The company’s focus on regulated utilities means cash flows are steady, which enable such a predictable and increasing dividend stream.

The company has also found some growth opportunities in modernizing older water infrastructure. Given the water quality crises we’ve seen in cities such as Flint, there is increasing government focus on improving older infrastructure. Essential can play a role in updating these vital pipe and treatment facility networks while earnings a regulated return on capital for doing so.

Global Water Resources (GWRS)

Don’t let the name fool you, Global Water Resources (NASDAQ:GWRS) is a smaller utility that has a laser focus on just one state, Arizona. It is based out of a Phoenix suburb.

Over the years, it has accumulated a wide service area in numerous towns and suburbs in the Phoenix and Tucson metropolitan areas.

Arizona is a unique market in that its growth patterns encouraged the development of hundreds of tiny water utilities, each of which often service an area as small as one subdivision or small town. Recent regulatory changes have made it harder for small Arizona utilities to remain independent, thus causing a wave of consolidation. Global Water has acquired more than half a dozen other Arizona water utilities in recent years.

This makes GWRS a strong growth stock within the typically staid utility industry. And Arizona itself is booming. Thanks to immigration and retirees moving to Phoenix for warm weather, Arizona has been one of the fastest-growing states in the country.

More people means more water usage, and, in turn, more profitability for Global Water. In the meantime, the company also rewards shareholders with a monthly dividend which gives investors steady reliable income.

On the date of publication, Ian Bezek held a long position in ECL, WTRG, and GWRS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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