There’s No Reason Left for You to Ignore This Critical Commodity

What’s the first thing you picture when I mention “Buffalo, New York?”

Its National Football League (NFL) team, the Buffalo Bills? Spicy chicken wings? Blizzardy weather?

If you’re local, you might say the annual Turkey Trot race.

For me, it’s nearby Niagara Falls State Park.

Consider the more than 700,000 gallons of water that flows over the park’s massive waterfalls every single second.

People in areas near Buffalo are fortunate. They can rely on a constant source of fresh water for drinking, boating, bathing, and hydropower.

Other places in the United States are not so lucky.

At a time when many investors are worried about the market’s health and stretched valuations, I want to overstress the value of water as an investment.

Through rain and shine, water businesses are highly profitable and offer a defensive hedge against inflation and economic downturns.

Lessons from the Colonial Pipeline

As we wrap up this week’s series on commodities, consider this takeaway.

Americans take certain commodities for granted.

We don’t seem to consider the convenient access we have to inexpensive commodities and products in comparison to the rest of the world.

We assume gas stations will always have gas and stores will always have milk. 

Americans took recent shortages of ketchup packets and chicken wings in stride.

But what happens when they can’t fill their car’s gas tank?

We just found out.

As I said yesterday, recent gas hoarding across the East Coast was absurd.

People were filling up plastic gas cans and even garbage bags.

At first, I couldn’t imagine what scenes would look like if the situation involved a lack of access to drinking or bathing water.

But then, I remembered, similar hoarding of plastic water bottles happens anytime a hurricane or tropical storm approaches the Atlantic Coast.

And like the Colonial Pipeline and its fuel supplies, American water supplies are equally vulnerable to cybersecurity events.

Florida recently experienced a near-devastating attack to a local water supply.

In early February 2021, a hacker gained access to a water treatment plant’s network in Oldsmar, Florida. For a moment, the hacker hiked the levels of sodium hydroxide – better known as lye – in the local water supply to 100 times higher than normal.

If the plant operator hadn’t noticed the changes or had stepped away from the controls, the results could have been deadly. The threat of cyberattacks heightens an already growing challenge to bring clean water to a growing global population.

The World’s Most Precious Resource

Scarcity is the key to investment opportunities in commodities.

With water, it’s no different.

In 2008, Andrew Liveris, former CEO and chairman of The Dow Chemical Co., offered his thoughts on its investment potential.

“Water is the oil of the 21st century,” he said.

Many retail investors overlook water. It’s not a flashy commodity. It feels like it’s in constant abundance. I can turn on a tap and the faucet could run for days.

However, it’s been a favorite investment of billionaires, wealthy families, and investment banks for years. The late T. Boone Pickens once secured a large amount of rights to the Ogallala Aquifer, a massive underground water supply that stretches from Texas to South Dakota.

The family of former President George W. Bush owns nearly 100,000 acres of land in Paraguay that conveniently sits atop the Guarani Aquifer, one of the largest underground water reserves in South America.

Big water-rights investments by banks like JPMorgan, HSBC, and Goldman Sachs have prompted fears about “water barons” cornering the global supply.

This consolidation of water rights comes at a time when access to fresh water is waning. Ongoing industrialization and pollution, increased agriculture, and greater human consumption have created large shortages around the world.

Areas lacking access to water include China, Egypt, India, Pakistan, and parts of the western United States.

That’s right, places in the U.S. are running out of water.

America Is Running Out of Water

We might see images of snow hitting Texas. We’ll witness large tropical storms dump torrential rains across the Atlantic and Gulf coasts. Louisiana alone receives more than 60 inches of rain per year, according to National Geographic.

We can look at the Great Lakes (the source of 20% of the world’s surface freshwater) and believe we have abundance of freshwater in the U.S.

But we don’t.

Scarcity of water is as simple as supply and demand. As supply decreases, demand in the U.S. alone is expected to surge.

Americans already use an average 80 to 100 gallons of water per day, according to the United States Geological Survey.

And with the population swelling, certain regions will experience greater threats to their water supply.

In 2019, the journal Earth’s Future issued a startling projection. It suggests that half of America’s 204 freshwater basins might not meet monthly demand by 2071.

That might seem like quite some time before we feel significant effects. But that same journal noted that 83 of the basins could experience shortages as early as this year.

The threat of increased scarcity puts the onus on companies to meet rising challenges. We will require more infrastructure, more innovation, and greater access to new resources to address rising demand.

This can create remarkable opportunities.

The Water Watch List

If you’re interested in investing in water, you’re in good company as I noted earlier.

There are various ways to invest in the growing infrastructure, utility, and treatment of this precious resource. Let’s look at three companies in three categories that stand out.

Water Rights Companies: These companies own the rights to abundant water resources in places around the United States. One that stands out is Vidler Water Resources (VWTR). Vidler owns water rights, land, and infrastructure along the Colorado Basin. Its assets are in or near three fast-growing (and very thirsty) cities: Reno, Nevada; Phoenix; and Las Vegas. They literally sell water in the desert to towns and municipalities. Vidler is in the TradeSmith Green Zonewithin , and trades under $10 per share.

Water Utility Firms: Utility and infrastructure companies will be vital to the future of the nation’s water supply. American Waterworks Co. (AWK) controls more than 53,000 miles of pipelines across the United States. It also owns and operates more than 150 wastewater facilities, 75 dams, 1,100 wells, and 609 water treatment facilities. It has more than 3.5 million customers who rely on its services to deliver clean water to homes, military bases, and other facilities. The company will likely continue to expand its footprint beyond 16 states as this industry consolidates. Right now, AWK is in the TradeSmith Red Zone. Add it to your watch list, and consider waiting until it reaches the Green Zone. This can be a healthy, long-term investment in vital water infrastructure.

Bottled Water: In 2018, bottled water represented 25% of total beverage consumption in the United States, according to Statista. The reliance on and convenience of bottled water remains a major factor in the growth of this industry. Primo Water Corp. (PRMW) is a Tampa-based firm that owns a large portfolio of bottled-water brands. These include Crystal Springs, Mountain Valley, and Deep Rock. The company has 50 manufacturing sites across North America. The stock remains in the Green Zone with solid momentum in today’s market.

The competition and innovation in the water supply chain will heat up in the years ahead. Water is essential no matter how high inflation runs or how ugly the markets might be. This is a safe industry that typically provides solid dividends, intriguing upside, and a fascinating dive into our growing and changing demographics.

Next week, I want to talk to you about three of my favorite letters in finance and how you can use them to identify incredible trades and protect your portfolio.