Is Water the New Gold?

(By: M. Pantelic, 2011)

Introduction
The world is currently facing several problems that are closely related:

Environmental pollution

Climate change

Energy

Water

The problems are so overwhelming they can stagnate the economic growth of China! Desertification in China's province of Inner-Mongolia is increasing at a speed unseen before. And it is heading towards Peking.

This extreme drought may cause millions to move, away from Peking to some place where there is water. We are with over 6 billion people and our water use efficiency is embarrassingly low. Desertification, deforestation, climate change, pollution and several other issues reduce arable land significantly. No arable area, no water – no food.

To mine fossil fuels and other earth materials we need a lot of fresh water. Because of the rapid depletion of our earth mineral resources we are currently are mining in locations far away from fresh water… no water - no energy.

The investor's issues
Recent flood events may let you believe there is too much water, but the truth is far from this. There is plenty of rain falling but at the wrong time, in the wrong place and with ridiculous intensities. Australia faces floods in summer time and severe draughts in winter and they are not able to store and use that excess rainwater.

Due to increasing deforestation and urbanization with the vast paving of areas there is less and less places to store, hold and infiltrate water. Rainwater is immediately discharged into rivers and to the sea or causes huge landslides. It used to be held by the trees or infiltrate in places we now have roads.

Rivers are heavily polluted. China and other Asian countries are polluting the water bodies in such a pace that it may only take a few months from now before we can see devastating results.

Solutions are not the issue, we do have the solutions but they come at a cost and THAT is the problem. Think of proper integrated water resources management, desalinization of salt water, water savings, GEN crops that need less water and re-use of water. Nor governments nor companies are willing to invest in water.

As the problems are increasing rapidly the water sector looks very attractive from an investment point of view.

Last several years there was no business in water. Water related consultancy services are in turmoil and share prices dropped steadily:

Veolia (VE: NYSE) the French water utility giant dropped from $90 to $28 with a P/E of 13.3.

No one was interested in the company and the sector for a long time and now is the time to start looking at Veolia and the like. Most private investors like you enter a market when it is too late. That is why over 90% of private investors monthly lose 2% on their investments.

So do not just go with the flow and invest in the big name companies, but search for those hidden gems that are currently ignored. That is where you will make the money! And we believe the water sector is definitely one of those.

Water sector specifics
What do you have to know about the sector:

The majority if water utility firms are not stock listed! In most countries they are state-companies because water supply is regarded as vital for the country's safety. Just like defense. Those that are stock listed have performed very well historically.
A P/E over 40 was rather common because they are risk-free, generate high profits and are well managed.

Currently some of them are undervalued so find and buy those stocks now, as most investors do not want them. Issue is they are most interestingly when no one wants to enter the stock market, like early 2009.

The small cap companies focus on new technologies for water treatment; new filters, new materials, new techniques and related patents. If one of these companies is successful they are generally acquired by a large firm and the return on stock value can be mindboggling. Most of these high-tech firms will however not make this stage and fail before maturity. Most of these stocks are penny stocks – these are for risk takers and generally not interesting for the general public.

One interesting high-tech market is the desalination one. Desal is a high-cost, high-energy activity. The companies that come a the solution to turn seawater into fresh water at significantly lower cost and lower energy use than now have unlimited upward potential.

In short
The trend in the water sector is negative and stock values have been dropping for over three years now. However, the water sector is a promising sector with incredible upward potential and the negative trend can change to positive any time.

Getting into the sector at this stage comes with increased risk and most investors do not fancy looking at reducing stock prices. If you do not mind – do your research and get in now. If you do mind – then wait, wait until the trend has turned positive.

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