Three Easy Ways to Invest in Water

by Justin Dove

Three Easy Ways to Invest in Water You can be a contrarian. Or you can be a victim. If you prefer the former, here are a few simple ways to invest in water.

“You can be a contrarian. Or you can be a victim.”

– Rick Rule

As Executive Editor of Investment U, I’m dedicated to providing you with the most sound investment philosophies and unique contrarian investment ideas on a daily basis.

And as our Chief Investment Strategist Alexander Green wrote earlier this year, our newsletter’s aim is to provide you with “the best investment you can make in four minutes each day.”

In that light, I made some time to sit down with legendary resource expert Rick Rule at our 14th Annual Investment U Conference two weeks ago. Rick is the Chairman and CEO of Global Resource Investments LTD – part of the Sprott Group of Companies.

Rick is known to be a fierce contrarian. So of course I was curious – as I’m sure many of you are – what he sees as the most contrarian investment right now.

His answer may surprise you…

“The most obvious contrarian investment that I see isn’t one that people are pessimistic on, it’s one that people ignore totally,” Rule said. “It requires patience, but that commodity – the most underpriced commodity that I see in the spectrum – is water.”

And Rick isn’t the only one who sees water as an intriguing opportunity right now. Our own emerging markets expert Carl Delfeld recently told Oxford Club members:

“During the last century, oil was at the heart of the global economy. Nearly every development in the financial news was somehow linked to its price and availability. But in the twenty-first century, I believe the price and supply of water will dominate the headlines.”

Carl also cites a World Bank estimate that global water demand will actually double every 20 years.

Global Water Demand

Who else is making a big bet on water? None other than T. Boone Pickens

As Carl alluded to in his recent article in The Oxford Club’s Communiqué, Pickens – through a company he controls called Mesa Water L.P. – is the largest individual water owner in America.

So what’s so impressive about water?

Politics, Politics, Politics…

In his article, Carl mentions that governments heavily subsidize water prices and like to keep tight control over water supplies.

Hmm… Governments meddling in free markets? Who would have thunk it?

Rick, who’s based out of California, is especially knowledgeable about the situation in his own state.

“[Water is] delivered politically, which means the market doesn’t work. Which means ultimately the supply won’t work because it’s mismatched with demand. In California, we use water for such ‘intelligent’ things as growing rice in the desert and producing subsidized alfalfa.

“[Meanwhile] the highest and best use in the state of California is flushing toilets and brushing teeth. And yet we supply water to some farmers in California for prices in the range of $55-$60 an acre foot and we charge urban users $1600 per acre foot. But the delta between $50/acre foot and $1500/acre foot is a very, very, very interesting arbitrage – which is effectively political.

“People who have watched the movie ‘Chinatown’ understand something about the genesis of this politics. The takeover by the city of Los Angeles – fair and square by the way, purchasing it in the market – of the water in the Owens Valley, united the agricultural community against urban users in the 1890s and 1900s. At that point in time, the state’s economy was predominantly agricultural and the political power base in the state was rural rather than urban.”

The result, according to Rick, is 85% of the state’s water resources being used to create 3% of the state’s GDP. An interesting market anomaly indeed…

But considering most investors don’t have the financial resources or the logistical ability to invest in actual water rights, how can average investors cash in on this arbitrage?

How to Invest in Water

“The simplest way to invest in water is to invest in water,” Rule said. “The most leveraged ways might involve the technologies. But that involves being right or not being right about selecting among the best technologies. What I prefer to do is either own water rights or own companies that own water rights. I prefer for my own investing portfolio to treat water itself as a resource.”

Rick also provides a few guidelines of what potential water investors should be looking for:

  • Scarcity and Locality –“Water is very local because its heavy, it costs a lot to transport. When making a water investment, one must invest in water at a place where it’s scarce. There’s no particular point in owning a bunch of water in Northern British Columbia where your challenge is to make it go away.”
  • Affordability –“The second thing it has to be, is in a place where it’s not only scarce, but where the market can afford to buy it. Unfortunately, owning water in Ethiopia or Eretria where the people can’t buy it, although they need it, doesn’t yield any economic return. So it has to be scarce and it has to be rich.”
  • A Sense of the Politics – “And the third thing is that water has traditionally been allocated politically. So you have to have some sense that there is going to be the rule of law and that there is, eventually, going to be a rational social response to the political idiocy of allocating water to votes rather than the market.”

Illustrative Examples

Rick is prohibited by regulation to make specific recommendations, but he did tell us that the most opportunistic regions were places like the U.S. Southwest, Southern Australia, Italy, Greece and Spain.

He also provided a few illustrative examples (not recommendations, mind you) of the types of companies that offer a play on water rights. Here are a couple:

  • J.G. Boswell (OTC: BWEL.PK) – Although it’s traded over the counter, it’s a 110-yr old company. It’s also the largest cotton farmer in the world and the largest tomato farmer in the world. It owns 2,000 acres of farmland and effectively 200,000 acres of pertinent water rights. Right now, the water is used to grow cotton and tomatoes…
  • Limoneira (Nasdaq: LMNR) – The second example of a water rights company masquerading as a farming company is Limoneira. It’s the largest independent lemon producer and one of the largest avocado producers. According to Rick, they control the some of the most important undeveloped water rights in Ventura County.
  • Pico Holdings (Nasdaq: PICO) – Pico is an acronym for Physicians Insurance Company of Ohio. Pico is a group of financial operators who took over insurance companies and have invested the float in a series of accretive transactions. Pico was the largest water rights owner in Arizona at one time and is currently the largest water rights owner in the state of Nevada.

There are also numerous mutual funds and ETFs that offer potent exposure to water rights and water technologies. So while “the herd” is loading into toxic bond funds and precious metals, investing in water as a resource may very well be the proverbial elephant in the room for well-educated contrarians like ourselves.

Good Investing,

Justin Dove

P.S. Rick clued me into an incredible – and better yet, totally free – resource for investors who want to learn more about the energy and resource industries. You’ll definitely want to bookmark this page…

To check out Sprott Global’s free Investment University lecture library along with other helpful resources, click here.

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Two Great Water Dividend Stocks

In today’s issue, we offer three speculative water investments. But we’ve also mentioned two outstanding – and safer – investments dealing with water over the last couple weeks in this space.

The first was a company we just talked about last week, Aqua America (NYSE: WTR). As you recall, WTR is a perpetual dividend raiser and one of the few companies that also offers a discount for investors in its dividend re-investment plan (DRIP).

It’s one of Marc Lichtenfeld’s favorite dividend stocks because of not only its solid fundamentals and performance, but because of its play on the water trend.

Here’s an excerpt of what Marc recently wrote:

“Aqua America boosted earnings per share last year from $0.86 to $1.03, an improvement of 21%. It’s already received about $10 million in rate hikes this year and is waiting for decisions on another $58 million.

“The company also has a new opportunity, one that could mean a lot more revenue: water pipelines.

“Let me explain…

“Water is a key part of the “fracking” process used by natural gas drillers to crack open underground rock formations. Each well, using this method, consumes as much as six million gallons of water. But that often means drillers are consuming – and competing for – local supplies. It also raises the ire of local residents and farmers. So a natural gas company hired Aqua America to build a pipeline to bring water in from elsewhere. With that pipeline now completed, Aqua America’s management is now in talks with other natural gas companies in the Marcellus Shale drilling area, which extends from New York and Pennsylvania all the way down to Virginia. Since Aqua America has already proven it can complete the project, new contracts should be forthcoming soon.

“Analysts project revenue of $794 million in 2012, but I expect it to be above $800 million.”

Secondly, we recommend a stock that Carl Delfeld recommended to Investment U Plus two weeks ago – Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS). SBS is up about 3.5% over that short time period, however the real rub for the Brazilian water utility is its juicy 7% dividend yield.

According to Carl:

“The company has plenty of room to grow in Sao Paulo, other regions in Brazil, and even in neighboring countries. Sao Paulo’s population is over 40 million and represents 30% of Brazil’s total economy.

“Second, the stock has a stellar record over the past decade with an annual earnings per share growth rate of just over 19%. SBS is also showing strong momentum, up 27% over the last six weeks, so don’t forget your trailing sell stop.

“SBS’s last quarter showed 10.2% revenue growth year over year, and despite its strong performance over the past six months, trades at a reasonable 11 times trailing earnings.

“Third, as a utility, SBS offers a nice 7% dividend yield. In comparison, the average dividend yield for a U.S. utility is 4%. SBS offers a huge premium to Treasury yields.

“While SBS is an excellent water play, you’ll be hearing much more from me in the coming months about growth ideas in the global water business.”

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