Wading Deeper Into Water Stocks

In my first two articles on water, in February and June of 2005, I outlined a number of reasons to be a long-term bull, namely the threat of terrorism and the development of Third World nations. But the root of this bull market is simple: Unlike oil and gold, water is absolutely vital to human survival. And not just any water, but clean, purified water.

In my first article, I recommended four stocks: Cuno, Consolidated Water (CWCO - commentary - Cramer's Take), Pentair (PNR - commentary - Cramer's Take) and Watts Industries (WTS - commentary - Cramer's Take).

Since then, Cuno has been bought out, Watts Industries has been relatively flat, Pentair is down slightly, and Consolidated Water is up roughly 60%.

Here are my current thoughts on these names (company data provided by CapitalIQ):

Watts Water's products include backflow preventers, fire protection systems, water pressure regulators, water supply and drainage products and temperature/pressure valves. While it has a somewhat significant amount of debt, $316 million, this is equivalent to only 2.5 times EBITDA. When considering its price ratios -- less than 20 times earnings and about 10 times EV/EBITDA -- this company doesn't seem too expensive, given the potential upside of the long-term water bull market.

Consolidated Water uses reverse osmosis technology to produce freshwater from seawater, which it distributes to public utilities, commercial/tourist projects, residential properties and government facilities. Its reverse osmosis technology is an inexpensive way to convert saltwater into a commodity of value, but the stock is pretty expensive: 40 times earnings and 30 times EV/EBITDA. Although I'm not sure the company is worth this valuation, I certainly believe its technology is interesting.

Pentair makes products used in the movement, treatment and storage of water, including turbine pumps and light-duty diaphragm pumps. Talk about efficient markets! This company is priced about the same as Watts: 18 times earnings, 10.6 times EV/EBITDA and 2.2 times debt/EBITDA.

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At the time of publication, Altucher and/or his fund held none of the issues mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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