Dykstra: Swimming With Aqua America

After a brief foray into the technology sector with my last two columns, it's time to focus on natural resources again. This time the natural resource is not oil or natural gas but our most basic and overlooked one: water.

Water shortages out West have been getting a lot of media attention, and as cities continue to sprout in more arid climates, the lack of water will provide increasingly higher burdens for metropolitan growth -- a situation that could create investment opportunities.

Today's pick, Aqua America(WTR Quote), has a limited presence out West, but the company's business model and outstanding CEO make it an excellent opportunity.

The company provides water or waste-water services to customers in 13 different states, with the majority of its revenue coming from Pennsylvania. In January 2007, Aqua America completed its purchase of the New York Water Service, providing a vast new market for the company; it's just the latest in a series of nearly 200 joint ventures and acquisitions over the past 10 years.

The abundance of acquisitions and agreements has allowed Aqua America to fatten its profit margins and grow quickly. As federal water-quality standards continue to tighten, existing infrastructure must be replaced in many localities. Smaller companies cannot afford the drastic overhaul necessary; through its size, continued acquisitions and keen management by its CEO, Nick DeBenedictis, Aqua America has gained a remarkable advantage in this area.

With the spate of new regulatory measures, the industry faces unique challenges in dealing with these increased costs. Water is tightly regulated by both local and federal offices. In order to implement a price increase, utility companies must have the capacity to withstand significant regulatory lag until the higher prices are approved.

DeBenedictis expects many of these increases to go into effect during the next couple of years, providing a significant boost to Aqua America and its shareholders, and that's why this is today's trade idea.

Aqua America closed trading Monday at $22.84. I will place a limit order to buy 10 contracts of the September 20s (WTRID) for $3.30. As a reminder, in order to ensure that a gain is realized, once that order is filled I will immediately place a good-till-canceled sell order $1 above my purchase price; this guarantees that gains achieved on paper will make their way into our pockets. Speaking of "making sure the gains make their way into our pockets," tomorrow I will be updating the Portfolio Scorecard. I believe you all will be pleasantly surprised; stay tuned!

Game of Life

We often hear stories of incredible human feats and marvel at the seeming impossibility of these accomplishments.