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Water stocks have long been underrated in the investment world since the basic necessity of life is most often taken for granted. We certainly cannot imagine a world without technology, but can we even survive in a world without fresh water? In the wake of drought conditions in California and other states last year, people can no longer be oblivious of the situation.


Demand for fresh water – which accounts for a meager 2.5% of the world’s total water content – is growing along with urbanization and ever-increasing global population. Today, a major part of water infrastructure in the United States is approaching the end of its useful life. 

Are we nearing a time when we have to stop drinking water directly from the tap? Per the Natural Resource Defense Council, cities like Atlanta, Albuquerque, San Francisco, and Fresno have “fair-to-substandard” drinking water. If a city has substandard water quality, then tap water may be carrying a good number of contaminants. Consumers have started to question the quality of the water they drink.

Upgrade and Replace – Need of the Hour

In recent times, drinking and waste water infrastructure in the U.S. has been under the spotlight. The talking point right now is whether the amount of infrastructure investment planned by the U.S. government is equal to the sum required for replacing the aged and outmoded water infrastructure.

The U.S. Environmental Protection Agency (EPA) last conducted its Drinking Water Infrastructure Needs Survey and Assessmentback in 2011. The report outlined that an investment of around $384 billion will be required over the next 20 years to modernize and upgrade U.S. water and waste water systems. On the other hand, a careful analysis by the American Water Works Association (AWWA) showed that about $1 trillion will be needed over the next 25 years only to restore underground pipes.

Consolidation Holds the Key

The water utility space is highly fragmented, as there are a number of water utilities in the U.S. operating on various scales ranging from thousands of customers to millions. The disjointed water industry has raised concerns about whether the smaller systems are sustainable in terms of competence and adaptability.

A plausible solution is the consolidation and integration of local and regional systems into large-scale structures. This would free up access to the capital markets for infrastructure development in order to provide reliable water services. This also explains the frequent acquisitions taking place in this space right now.

Top Players in the Water Industry
 

The growing scarcity of water will definitely lead water utilities to prosperity, making them an enduring investment play. Big players in the water industry are getting even bigger through a number of acquisitions and large infrastructure spending.

The largest publicly traded water and waste water service provider in the U.S., American Water Works Company, Inc. (AWK - Free Report) , has recently made several acquisitions of water systems near its service territories. The company is growing by both organic and inorganic means. In 2014, the water utility closed 13 acquisitions, adding almost 4,500 customers to its regulated business. Headquartered in Voorhees, N.J., American Water Works provides drinking water, wastewater and other related services to approximately 15.6 million people in 32 states and Ontario, Canada. AWK is a #3 (Hold) on the Zacks Rank.

Consolidated Water Co. (CWCO - Free Report) designs, builds, operates, and in some cases finances sweater reverse osmosis (SWRO) desalination plants and water distribution systems in several Caribbean countries, where the supply of drinking water is scarce and the use of SWRO is economically feasible. Consolidated Water was established in 1973, and is a #2 (Buy) on the Zacks Rank.

Artesian Resources Corp. (ARTNA - Free Report) is the parent company of Artesian Water Company, which provides water utility services to customers in northern Delaware. It seeks to provide the best water and best customer service, and Artesian’s water business accounts for nearly 90% of its revenues; Artesian is the eighth largest investor-owned water utility in the U.S. by total capitalization. ARTNA is a #2 (Buy) on the Zacks Rank.

Committed to providing its customers with safe, dependable, high-quality water, The York Water Company (YORW - Free Report) operates entirely within its franchised territory, which covers 48 municipalities within York and Adam Counties in Pennsylvania. York Water is regulated by the Pennsylvania Public Utility Commission, or PPUC, in the areas of billing, payment procedures, dispute processing, terminations, service territory, and rate setting. YORW is a #2 (Buy) on the Zacks Rank.

Share prices of each stock have increased significantly since the beginning of the year. AWK, CWCO, and ARTNA gained 7.63%, 16.59%, and 22.21%, respectively, while YORW has lost about 9% during the same time frame. These water companies also have an impressive earnings track record, and are reliable dividend players, known for consistently sharing their profits with shareholders.

Conclusion

Though the water industry has long been affected by low rates and geographical and functional fragmentation, the pressing need of the hour is to replace hundreds of years of old pipelines and pumps. Now that most are in agreement that water is an essential element to all living things, the big question in the country is how to modernize dated infrastructure.

In terms of investment opportunities, there is speculation that water will be the next oil. Moreover, recent droughts have definitely made us realize that water isn’t as abundant as we think. So, why not add some cool water stocks to your portfolio to quench that investment thirst.

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