The 3 Best Water Stocks For Value Investors In 2017

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Article by Vintage Value Investing

Water stocks have performed extremely well over the past 3 years. This is especially true of water utility stocks, both because they are well-regulated and because they act like natural monopolies. Although water utility stocks, following a long period of growth, have experienced some pull back since mid-2016 (and may continue this trend over the near term), they remain among the strongest and safest long-term stock investments.

Water Stocks

Read: How to Invest in Water Like Dr. Michael Burry from The Big Short

There are nine water utility stocks with market caps greater than $300 million dollars. Here are those stocks, along with their total 10-year return (for reference, the S&P 500 average 10-year return is 96.7%):

  • American Water Works: 349.8%
  • Sabesp: 152.7%
  • Aqua America: 114.5%
  • American States Water: 192%
  • California Water Service: 121.4%
  • SJW Group: 68.6%
  • Middlesex Water: 203.1%
  • Connecticut Water: 220%
  • York Water: 170.4%

Of these, three stand out as the strongest for long-term value investors. They are:

1. American Water Works

Because of its size (of publicly traded water and wastewater utilities in the United States, it’s the largest, operating in 47 states and 1 Canadian province), American Water Works has a unique ability to acquire smaller utilities in a heavily fragmented industry. That provides the company an unparalleled expansion opportunity in areas geographically close to its current operations that bodes well for long-term investors.

Its geographic diversity provides another advantage—American Water Works faces less threats from the impact of regional climate change, such as droughts. In addition, the American Water Works’ recent expansion into providing water for gas exploration and production companies (with its acquisition of Keystone Water Solutions in 2015) promises increased earnings with expected continued recovery in the energy market.

Current analyst estimates put growth earnings at an annual rate of 7.6% for the next five years. Although projected growth for one other pure-play water utility, California Water Services, is slightly higher at 7.8%, the lion’s share of that growth will occur this year. With expected steadier growth in the long-term, American Water Works stock offers a stable, safe investment option.

2. American States Water Company

American States Water, with operations primarily in California, is significantly smaller than American Water Works—that smaller size, however, has empowered the company to achieve rapid growth. Over the past decade, American States Water has posted an average annual growth rate of 7%, and an average annual profit of 12.5% over the past five years. Its forward valuation is 23.5; its dividend yield is 2.2%.

American States Water operates the Golden State Water Company in 10 California counties. It also manages both an electric utility and contracted services on water projects at U.S. military bases across the country. Although the company’s relative lack of diversification, concentrated as its operations are in one state, are some reason for concern, expectations are that it will continue to grow, taking advantage of California’s booming economy.

3. Aqua America

Providing water and wastewater services to some three million people in Pennsylvania, Ohio, Virginia, North Carolina, Illinois, New Jersey, Indiana and Texas, Aqua America’s diversification and unregulated market basis are among the reasons analysts cite for the company’s robust growth and long-term prospects. Aqua America has, in addition, an aggressive acquisition posture—in 2012, for example, the company, in a joint venture with Penn Virginia Resource, initiated services supplying water fracking operations in the Appalachian basin.

All these factors have made Aqua America attractive to investors. The suburban Philadelphia-based company boasts an impressive 70 consecutive years paying investors dividends, and 23 consecutive years of increasing dividends. The company’s trailing 12-month profit margin is a healthy 25.4%, one of the highest of any water stock in the nation, and substantially higher than American Water Works’ 15.1%.

Conclusion

How you make stock investments is a function of how much risk you’re willing to take. High-risk investments have the advantage of potentially high profits, for example. The water stocks listed here are noted as among the “best” because of they represent relatively low-risk and have consistent performance over many years. They are, for that reason, smart stock selections for investors who are in it for the long haul. Before finalizing your stock picks, make sure you take a read through The Official Water Stock Guide, as well as The Ultimate Guide to Value Investing.

Article by Vintage Value Investing



About the Author

VintageValueinvesting
Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…