Oil and gold get all the headlines when you’re talking about investing in natural resources. But, as Chris Mayer explains in today’s guest essay, there’s an even more valuable resource that you should consider investing in… and there’s a right and a wrong way to play it…
Best regards,
Frank Hemsley
For The Right Side
How to invest in the world’s most valuable resource
BY CHRIS MAYER
Dear Reader,
I recently picked up Steve Hoffmann’s new book, Planet Water: Investing in the World’s Most Valuable Resource. Hoffmann is well known in water circles. He’s the founder of WaterTech Capital, a private group focused on water investing. He’s also the creator of the Palisades Water Index, which many water funds use as a benchmark.
I’ve been researching water investments for years now. I believe that as the developing world becomes richer over the coming years, it’s going to spend enormous amounts of money to secure clean water supplies. This means terrific opportunities to make money investing in water stocks.
Hoffmann’s book has some good information and research on water issues, if dryly presented. Hoffmann is not the best of writers. Still, it’s nice to have it all between the covers of one book. There are certainly many opportunities in the water sector for investors. It’s one of the most exciting areas of the market to be a part of.
For one thing, it is an incredibly large sector. Water is the third-largest industry in the world, behind only oil and gas and electricity generation. For another, some of the drivers of water use are only getting bigger as this human drama unfolds. Hoffmann points to these three, among others:
▪ Industrialization. As a country develops, its water use expands even faster. As people earn more money, they wear better clothes and buy more consumer products. All of these things have a high water content. Not too many people understand how much water we use to make a pair of blue jeans, for instance. (It’s about five gallons.) Yet this water use is all too real. Then there is the matter of diet. As people make more money, they shift to eating foods that have a much higher water content or that take more water to produce – fruits and vegetables and meats.
So all of this is a tremendous source of growth for water demand. India alone, for instance, expects water demand to double between now and 2025 – and industrial water demand should triple.
▪ Urbanization. More and more people around the world live in cities. And more are moving to cities with each passing year. In 2007, more than half of the world’s population lived in cities for the first time in history. Our cities are also bigger than ever. For example, some 9% of the world’s population lives in cities of more than 10 million people.
Well, people in cities use more water than those not in cities. To support all that water use requires a lot of pipes, pumps, and more. As Hoffmann writes, the infrastructure needed to support urban water use is “staggering”.
▪ Globalization. When goods can more easily travel across borders, water use tends to increase. Suddenly, you can build cities in areas where older human societies would never have thought to build a large city. Basically, we’ve created a sort of virtual water trade.
“Countries with a relative abundance of water,” Hoffmann writes, “can grow food and trade it to water-stressed countries.” The sheiks in Dubai are grateful, no doubt.
As I’ve pointed out, water is big business. And Hoffmann goes through a variety of sectors, highlighting the issues facing each and compiling tables of companies in each space. Let’s walk through a few of them.
The biggest part of the water industry – and the one everybody thinks of first – is the water utility group. There was a time when I liked the water utilities. I can say I’'ve never lost money on a water utility. For years, investing in water utilities was an easy way to beat the market. But things are changing.
I’ve come to think that the water utilities have to support an enormous investment going forward. And they have to do that in a political environment not favourable to water price increases. Bad mix, that. Hoffmann agrees. “Public policy will dictate rate increases,” he writes, and “water utilities will then [see] increasing pressure on profit margins.”
For this reason, I’d pass on the water utilities. There are far better opportunities in the water industry’s “picks and shovels” providers... the companies that provide products and services needed to supply clean water.
Take water treatment, for example... As Hoffmann writes: “The fundamentals of the [water] treatment sector... are extremely compelling. Virtually all global water quality issues come down to treatment in one form or another.” Water treatment means taking raw water and purifying for some use, either industrial or for human consumption.
My favourite water treatment company is Nalco Holding (ticker: NLC, New York Stock Exchange), a company my readers have owned for a long time. Warren Buffett recently joined us as the firm’s largest shareholder. Hoffmann gives a nod to Nalco as “the preeminent publicly held water treatment chemical company in the world.”
Infrastructure is another great picks and shovels play on water. This is one of my favourites, because it is easy to understand and there are several good ideas in the space. Infrastructure covers all the pipes, pumps, valves, and more that make up the physical framework that supports water delivery. As Hoffmann says, the importance of this sector “cannot be overemphasized”.
This is why I’ve recommended several of the best players in water pipe and water pump manufacturing. I expect their sales and profits to enjoy a huge tailwind over the coming years.
To sum up, if you’re looking for long-term water investments, keep in mind the pressure water utilities will face to keep their profits down. Avoid it. The “picks and shovels” of the water boom offer much bigger opportunities.
Good investing,
Chris Mayer
For The Right Side
Editor’s note: Chris Mayer is the editor of Mayer’s Special Situations, a monthly investment advisory published by our sister company, Agora Publications and focusing on small, hundreds-of-percent-upside investments. For information on how to access the Special Situations portfolio – including Chris’ top water picks – click here.
This article was first published in the free investment newsletter The Daily Wealth.
MARKET NOTES
Defensives are a great long-term recovery play
BY SHIVVY ARORA
Here’s a way to exploit volatility in the markets to your advantage – invest in attractively valued equities.
Take a look at defensives. These are stocks that tend to remain stable under tough conditions. Interest in them has subsided since mid-March this year. Investors gradually built up risk appetites and started buying exposure to cyclicals (stocks sensitive to business cycles such as auto and energy).
Defensives such as healthcare, food and tobacco have lost their record high of late-2008/early-2009. They’re now trading close to their 15-year lows.
But this isn’t necessarily bad news. In fact, it means you could buy them at a rare discount.
The chart below shows the performance of one defensive sector, the FTSE 350 Healthcare Services Index (red line) and one cyclical sector, the FTSE 350 Auto Index (grey line) against the FTSE100 (green line).
Defensives may have been left behind in the rally but have strong resilience
If you would like a larger version of this chart please click here
Source: Financial Times
Healthcare started the year outperforming both Autos and the broader market by a good margin on investors’ low risk appetites. But the tide started turning in April as folks got bolder and started piling into cyclicals, causing defensive sectors to plateau.
But valuations in a lot of defensives look interesting. Many have stable earnings, strong balance sheets and stand to benefit hugely from emerging markets growth.
You’d do well to look for defensives that have overseas exposure - this boosts their growth prospects. Large-cap, high-yielding stocks such as GlaxoSmithKline and Unilever are a good bet.
The safety of defensives is a big draw but so is the cash generation and dividend. And you can bet that we’ll see investors ploughing back into these shares as soon as markets tank again.
The Daily Reckoning – What if the US had to pay its debt in gold?
BY BILL BONNER
London, England
Wednesday, 8 July 2009
The stock market seems to be rolling over. Investors read the news. It’s probably becoming clear to them that the economy is not going back to normal any time soon. Yesterday, the Dow lost another 131 points. Another big day down and it will be in the 7,000-range.
Oil sank too – down to $62. The dollar, bonds, and gold stayed about where they were.
Economists are still talking about an “exit strategy.” But in view of what is actually going on in the economy, they’ll probably want to stay on this highway a lot longer. This is the long road to ruin, of course. It may be fatal, but it is not – yet – unpopular. Broadly, what is happening is exactly what should be happening.
The stock market rally is getting old... and may have already peaked out.
The consumer is running out of time, money and credit. He has no choice but to cut back. Savings rates are rising fast – from zero to about 5% of disposable income. Naturally, businesses are finding it hard to make sales. Earnings are collapsing... stock dividends are down sharply...
... and of course, businesses try to cut expenses by lightening up on their payroll. When the correction began, it was led by losses in the financial sector. Those loses led to cutbacks throughout the economy. Now, it’s the cutbacks that are leading to financial losses. The economy followed the markets; now the markets follow the economy. Investors are realizing that their favourite companies will find it hard to prosper in this new economic environment.
“US consumers fall behind on loans at record pace,” says a Reuters headline. Delinquencies are going up on a wide range of household debt. Debtors have never had such a hard time keeping up with payments. Credit card delinquencies, for example, are running at 6.6%.
Well... duh.
And no wonder “banks get stingy on credit,” as reported in the USA Today. “Despite massive government efforts to bolster the credit market, banks are pulling back severely on card lending,” begins the front page article.
Once again, we see the feds’ plans failing. They give trillions to the bankers; the bankers cut back on consumer credit. And why shouldn’t they? They can see what the rest of us see – the consumer can’t keep up with the debt he’s got already.
At least, the consumer has wised up. He’s sick of debt. He’s seen where that road leads. What he wants is to get out of debt... to be free... to be safe.
It’s the government that remains stuck in deep illusion... The feds know that it was too much credit that got consumers into trouble. Their solution? Give them more credit!
The banks are issuing fewer credit cards than they did last year – 38% fewer. They’re pushing credit limits down too – the average limit on a new card is down 3% so far this year.
Instead of passing money on to customers, the banks are using the feds’ free cash to build up their own reserves... raise their salaries... and pass out bonuses. Makes sense. What else could they do with it?
Read on...
To read the Daily Reckoning in full, click here.
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