Dipping a Toe Into Aqua America

With most companies and industries taking a beating, and even the definition of deep value changing by the day, I'm going back to basics with this one. I am a strong believer that investors need to have exposure to water in their portfolio, and Aqua America (WTR - commentary - Cramer's Take) is one of the few ways left to invest in the utility side of the water business.

Water is as unexciting as it is imperative for survival. It's perhaps the only renewable resource (conceivably, there's as much fresh water on the planet now as there was 100 or even 500 years ago) that is actually becoming scarce. That's because the world population has risen significantly, and sources of clean fresh water (such as the Colorado River) have become overburdened as population density increases.

I've written previously about owning companies that own water in the ground -- like PICO Holdings (PICO - commentary - Cramer's Take) and JG Boswell (BWEL - commentary - Cramer's Take) -- but Aqua America is a different animal, acting as a holding company for the vast portfolio of water and wastewater businesses it has acquired over the years. The company has been very aggressive, with 90 acquisitions in the past five years, and 120 since the early 1990s. Today, Aqua America serves more than three million customers in 13 states. More than half of revenue is generated in Pennsylvania, and Aqua is by far the nation's largest publicly traded water utility.

Admittedly, water utilities are certainly not exciting investments, and the fact that they are regulated entities rightfully suggests that capital appreciation opportunities may be more limited than most other businesses. Be that as it may, and especially in this environment, it's still not a bad idea to have exposure to some low-beta stocks with decent dividend yields.

Currently yielding 3% after an 8% dividend increase, Aqua shares are trading in the middle of their 52-week range, and are down about 13% year to date. This is about as close to a defensive play as there is these days. Shares certainly don't appear to be cheap at 25 times trailing earnings, but that's actually a reasonable valuation for this company, and not all that far out of line with where it has historically traded.

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At the time of publication, Heller was long PICO Holdings and JG Boswell.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.