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April 22, 2018, 5:04 p.m. EDT

How to invest in water: A long-term bet on an essential commodity with limited supply

World Water Day has triggered a flurry of reports on a commodity that could make you money in the long term

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By Ciara Linnane, MarketWatch

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“We believe the leading companies in these markets are fast becoming major drivers of global economic growth,” he said.

Cornerstone Capital Group said investors should proceed with some caution, however, as water financing trends show that while private investing activity in the water sector has grown since the 2000s, “attractive opportunities remain limited, and recent interest has been concentrated in the intersection of water and technology.”

Those who want to use their capital for technology and infrastructure upgrades are heavily reliant on government. California, for example, reacted to the drought that began there in 2015 by investing in groundwater management and wastewater treatment plants, and developing policies that would better match resources and balance supply with demand.

“Investors seeking to ensure water supply or demand efficiency in California had few options,” analysts led by Sebastien Vanderzeil wrote in a report published Thursday.

Still “crises can act as catalysts for corporates, governments, and broader society to focus on building resilient water systems. We continue to watch the Cape Town crisis to understand how this event might create opportunities for water-focused investors in the near term,” said the report. (MPH@GW, the online MPH program)

Think themes

Investors seeking pure-play water stocks can consider Xylem Inc. /zigman2/quotes/208279712/composite XYL -3.66% , a water technology company that was spun out of ITT Inc. /zigman2/quotes/203522138/composite ITT -4.16% in 2011. There’s also Evoqua Water Technologies /zigman2/quotes/202309805/composite AQUA -2.72% , which went public last November; it makes filtration products to remove impurities from water.

But with few others to invest in, Cornerstone said investors need to think more broadly about the future of water and suggested thinking in terms of themes, such as the Internet of Things, or the many ways our homes and daily lives are wired with electronics and sensors. “Advanced sensors help to enable the IoT in water,” said the report.

3-D printing is another technology that will likely be used to crease membranes for water filtration. For now, they are unable to accurately print at an industrial scale, but that is expected to change as the technology evolves.

Click to Play

Can boxed water compete against bottled water?

Water companies are turning to environmentally-friendly packaging - and sales have doubled in the last two years.

In the fixed-income space, Cornerstone suggests green bond strategies as a way to get exposure to water. “While these strategies are not exclusively focused on water, water investments, often those related to infrastructure upgrades, will usually account for some percentage of the fund,” said the report.

Municipal bonds are a more direct play on water, wastewater and sewage-treatment facilities at state or local level.

One other company that is benefiting from water is Texas Pacific Land Trust /zigman2/quotes/203839070/composite TPL -3.19% , which is typically viewed as a Permian Basin play. The trust was created in 1888 after a reorganization of the Texas and Pacific Railway Co. following receivership. Today, it manages about 888,333 acres in 18 counties in, according to its website, and receives royalties from oil and gas, grazing leases—and water sales.

In June 2017, the trust announced the formation of Texas Pacific Water Resources LLC, a company that is focused on offering water to operators in the Permian Basin, who require large amounts of water for hydraulic fracking.

It its most recent quarter, water sales rose 172% to $6.0 million from $2.2 million in the year-earlier period. That brought the full-year total to $25.5 million, a 214% increase from 2016. The stock has risen eightfold in the last four years.

Then there is Lindsay Corp. /zigman2/quotes/204692829/composite LNN -2.68% , which offers irrigation services, including the manufacture and marketing of center pivot, lateral move, and hose reel irrigation systems. The stock has gained 10% in the past year.

Lindsay’s competitors include Valmont Industries Inc. /zigman2/quotes/206914223/composite VMI -1.47%  and Toro Co. /zigman2/quotes/206874474/composite TTC -4.64% , which have irrigation business segments.

Companies are focusing on water management

Water management has become an increasing priority for public companies, according to a recent report by sustainability nonprofit Ceres that sought to measure the progress made by more than 600 of the biggest listed companies in the U.S. in meeting environmental and cultural goals.

Read now: In Trump era it’s up to companies to push climate agenda, advocates say

The report found that 81% of companies in industries that require relatively large amounts of water — for example, the manufacturers of food and beverages, clothing and semiconductors — have water programs in place, but just 37% of them have set targets for prioritizing action in areas that pose the greatest risk to water resources.

The Guggenheim S&P Global Water Index ETF has gained 9% in the last 12 months, while the PowerShares Water Resources ETF has added 17% and the PowerShares Global Water /zigman2/quotes/207405758/composite PIO -3.16%  has risen about 13%.

The S&P 500 /zigman2/quotes/210599714/realtime SPX -4.04%  has advanced 12% in the same time frame, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -3.57% has gained 17%.

/zigman2/quotes/208279712/composite
US : U.S.: NYSE
$ 80.96
-3.08 -3.66%
Volume: 849,543
May 18, 2022 4:04p
P/E Ratio
34.81
Dividend Yield
1.48%
Market Cap
$15.13 billion
Rev. per Employee
$301,676
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/zigman2/quotes/203522138/composite
US : U.S.: NYSE
$ 70.06
-3.04 -4.16%
Volume: 433,093
May 18, 2022 4:00p
P/E Ratio
19.76
Dividend Yield
1.51%
Market Cap
$6.10 billion
Rev. per Employee
$282,101
loading...
/zigman2/quotes/202309805/composite
US : U.S.: NYSE
$ 35.36
-0.99 -2.72%
Volume: 788,402
May 18, 2022 4:00p
P/E Ratio
80.90
Dividend Yield
N/A
Market Cap
$4.41 billion
Rev. per Employee
$397,167
loading...
/zigman2/quotes/203839070/composite
US : U.S.: NYSE
$ 1,354.24
-44.67 -3.19%
Volume: 23,455
May 18, 2022 4:00p
P/E Ratio
33.01
Dividend Yield
0.89%
Market Cap
$10.83 billion
Rev. per Employee
$5.59M
loading...
/zigman2/quotes/204692829/composite
US : U.S.: NYSE
$ 124.71
-3.43 -2.68%
Volume: 90,620
May 18, 2022 4:00p
P/E Ratio
29.85
Dividend Yield
1.06%
Market Cap
$1.41 billion
Rev. per Employee
$552,124
loading...
/zigman2/quotes/206914223/composite
US : U.S.: NYSE
$ 248.57
-3.71 -1.47%
Volume: 126,974
May 18, 2022 4:00p
P/E Ratio
26.34
Dividend Yield
0.89%
Market Cap
$5.38 billion
Rev. per Employee
$335,795
loading...
/zigman2/quotes/206874474/composite
US : U.S.: NYSE
$ 76.61
-3.73 -4.64%
Volume: 404,845
May 18, 2022 4:00p
P/E Ratio
22.47
Dividend Yield
1.57%
Market Cap
$8.43 billion
Rev. per Employee
$366,765
loading...
/zigman2/quotes/207405758/composite
US : U.S.: Nasdaq
$ 32.53
-1.06 -3.16%
Volume: 15,655
May 18, 2022 4:15p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,923.68
-165.17 -4.04%
Volume: 2.71B
May 18, 2022 4:56p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
31,490.07
-1,165 -3.57%
Volume: 465.06M
May 18, 2022 4:56p
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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