XYL - 7 Best Water Stocks to Buy Now
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Water isn’t the easiest investment theme to bottle up. Sure, water is vital to many facets of everyday life. Access to clean water is a basic human right, and something that must be maintained at all costs.
But how do you invest in water? Like air, water sometimes plays a background role. People hardly ever think about it unless there is a flood, drought or other such inconvenience. That being the case, what is a water stock, and how can investors profit from this essential sector?
It’s helpful to think of water stocks within three major categories. There are companies that treat and distribute water directly, namely the utilities. That’s probably the most common type of water stock. The next big group is companies that make industrial goods tied to the water industry; think meters, piping, pumps, tanks and so on. Finally, there is the group of companies involved in environmental or industrial water treatment, such as firms that do sanitation, water recycling, water usage reduction and adaptive design, and so on.
The lines aren’t fully clear, and there have been some debatable choices within water exchange-traded funds historically as far as which companies make the cut or not. However, if an investor new to water stocks wants to get their feet wet, these seven water stocks are a great place to start.
TickerCompanyRecent PriceAWKAmerican Water Works$145.69WTRGEssential Utilities$47.28BMIBadger Meter$85.33ECLEcolab$158.24XYLXylem$80.96PNRPentair$48.21GWRSGlobal Water Resources$13.78American Water Works (AWK)
American Water Works (NYSE:AWK) is a large water utility, with a market cap of almost $30 billion. Despite operating in a low growth industry, American Water Works has managed double-digit annualized compounded earnings growth for many years now.
The company forecasts similarly agreeable 7-9% annualized earnings growth going forward. It is able to achieve this by rolling up small municipal water utilities and achieving cost savings and greater operational efficiencies.
AWK stock isn’t particularly cheap at the moment. However, shares are close to flat since the beginning of the pandemic, meaning that earnings and the company’s dividend have started to catch up with the stock price. And, as a dominant water utility with a healthy track record of dividend growth historically, AWK stock is a great core water stock holding.
Essential Utilities (WTRG)
Essential Utilities (NYSE:WTRG), formerly known as Aqua America, is a large water and gas utility. The company was entirely driven by water until recently, but that changed with the $4.3 billion purchase of Peoples Gas in 2020.
Both water and gas utilities tend to be slow-growth markets. However, that is offset with strong and stable cash flows. And, Essential Utilities has steadily replaced older water infrastructure to bolster its business. The way things have set up in the United States, there is a ton of old water systems in place that — like in Flint, Michigan — can lead to terrible problems when neglected. Water utilities such as Essential can earn a favorable return on investment for upgrading and modernizing these older water systems.
Essential Utilities is a steady growth and income investment. It is a Dividend Aristocrat, meaning that it has grown its dividend payout for more than 25 years in a row. WTRG stock currently yields 2.3%.
Badger Meter (BMI)
Badger Meter (NYSE:BMI) is a core water stock holding, focusing on the infrastructure angle. The company makes water meters, as you’d expect from the name, and has also built up a large business in water quality, with monitors, remote sensors and other such products.
While Badger Meter has primarily benefitted from sales to water utilities in the past, its growing business line in things such as water quality will potentially find wide applications in other markets, such as industrial discharge monitoring. Furthermore, the federal infrastructure bill allocated funding toward some water-related fields, which should results in sales for Badger Meter.
Historically, BMI stock has been extremely expensive. Investors are willing to pay a huge premium for Badger Meter’s high-quality recession-resistant business. With shares down nearly 20% this year, however, Badger Meter has reached a more reasonable 35x forward earnings multiple. That’s still not cheap, but companies of this quality rarely are.
Ecolab (ECL)
Ecolab (NYSE:ECL) is the world’s largest conglomerate involved in sanitation and hygiene. Companies like hotels, restaurants, airports and so on hire Ecolab to keep their places safe from bacteria and pathogens while maintaining hygiene and keeping facilities up to local regulatory codes.
As it pertains to water specifically, the company has a sizable business in water treatment and reuse. A factory, for example, might hire Ecolab to examine its water usage and figure out ways to reduce consumption or increase recycling of dirty water. As Ecolab also does lots of chemical and sanitation work for factories, there are natural synergies with focusing on a firm’s water usage as well.
Ecolab’s management has made a point of helping its customers meet their environmental, social, and governance (ESG) needs. Namely, by hiring Ecolab to improve a company’s water and environmental footprint, it helps a company bolster its reputation and thus attract more investor funding. ECL stock has gotten punished so far in 2022, but shares should rebound in due time, particularly as it benefits significantly from the rebound in the global travel and hospitality industries.
Xylem (XYL)
Xylem (NYSE:XYL) is a diversified giant of the water industry. Its primary business lines include water measurement, water infrastructure and applied uses of water. Think things such as water distribution, storage, testing and efficiency in water.
Xylem’s big appeal is that it is an all-in-one shop for water-related goods. A utility or industrial company can call Xylem up and get everything from testing to storage to efficiency solutions. This allows Xylem a great deal of cross-selling and efficiency in its marketing spend.
Like Badger Meter, Xylem is another seemingly perpetually expensive stock that has gotten hammered this year. At one point last year, XYL stock was trading above 50 times earnings. Now, it’s at a much more palatable 31 times forward earnings.
Pentair (PNR)
Pentair (NYSE:PNR) is a pureplay water infrastructure company. It focuses on two main angles: industrial applications and consumer solutions.
The consumer business is for swimming pools. Think everything you might need for a pool such as pumps, filters, heaters and so on. This business positively skyrocketed in 2020 and 2021 as people rushed to install their own pools during the pandemic. However, PNR stock has gotten slammed this year as traders worry that earnings from the pool business will evaporate.
However, it’s important to note that the company generates more than 40% of its revenues from the industrial business. This is a less cyclical operation focused on things such as fluid management for food and beverage companies. Regardless of what happens with the swimming pool market going forward, much of Pentair’s business will continue to hum along as always. Meanwhile, shares are going for just 13 times earnings at the moment.
Global Water Resources (GWRS)
Global Water Resources (NASDAQ:GWRS) brings a different flavor from the rest of the list. It’s a small water utility primarily focused on the state of Arizona. The company is a growth engine, as it has acquired numerous small water utilities serving the Phoenix and Tucson areas.
Over time, it should enjoy tremendous revenue increases as the Phoenix and Tucson areas continue to expand. Arizona is one of the fastest-growing regions of the country due to its warm climate and favorable tax rates. Global Water is there to soak up that upside.
The company benefits from having new water infrastructure, since virtually all the businesses and subdivisions that it services were built in the 1990s or later. There’s no aging pipes to worry about. Meanwhile, Arizona’s notoriously fragmented utilities market leaves dozens of viable acquisition targets for Global Water. Global Water is not a cheap stock based on 2022 earnings, but it just might have the most upside on this list due to its unique growth characteristics.
On the date of publication, Ian Bezek held a long position in WTRG, GWRS and ECL stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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