This column was originally published on RealMoney on June 21 at 1:01 p.m. EDT.

"There is nothing more yielding than water,
yet when acting on the solid and strong,
its gentleness and fluidity
have no equal in any thing."

-- Tao Te Ching

I can't pretend to be an expert on the water business but this most basic commodity has witnessed strongly increasing demand over the past several years in an increasingly global economy. I first wrote about the water industry on Feb. 28, and I cited several reasons for interest in water stocks:

  • The fear of a bioterrorist attack that would increase the need for both protection of existing water distribution (see this weekend's release of Batman Begins for a fictional version of this fear) as well as the need for tools to cleanse water.
  • Emerging markets not only increasing the need for clean water used in the production process but also increasing the pollution that is filling the rivers and lakes from which we drink.

One of these reasons is a negative (terrorism) and one a positive (growth of manufacturing throughout the global economy), but both are upward-moving trends that are never going to subside. Consequently, I recommended four stocks that were already cruising near their 52-week highs at the end of February. Despite the subsequent market selloff, all four of the stocks have continued to move upward and are still at 52-week highs, in some cases significantly higher than they were.

Cuno has had the most news and the largest point gain. The stock was at $56 and is now at $71 after 3M ( MMM) made an offer on May 12 to buy the company for $1.3 billion. James McNerney, 3M's chairman said about the acquisitions, "The size of the opportunity here is huge." He added that expanding its filtration business both organically and through acquisitions will continue to be a top priority.

This acquisition followed General Electric's ( GE) acquisition of Ionics last fall, and other water stocks have been going up in anticipation of further M&A activity in the space.

Consolidated Water ( CWCO - Get Report), the smallest company among the four I recommended, is up almost 30% since the article, to $39 from $30.75. The $225 million market-cap company, which is a water utility servicing the Caribbean, is benefiting from the growth in that region's economies. Despite the fact that these are islands in the middle of an ocean, there is a lack of drinkable water, and this company supplies the seawater conversion tools necessary to make water drinkable. Consolidated Water reported record earnings and revenue in April. From its earnings press release:
For the twelve months ended Dec. 31, 2004, total revenue increased 22% to a record $23.3 million, compared with $19.1 million in the previous year. Net income rose 48% to a record $6,197,383, or $1.05 per diluted share, versus $4,177,081, or $0.83 per diluted share, in the year ended December 31, 2003.

What's interesting about these results is that they occurred during a record-breaking hurricane season. Hurricanes close down water plants and decrease tourism, which reduces the need for water.

However, within weeks of the hurricanes, tourism was almost back to pre-hurricane levels and manufacturing and real estate development also picked up. Without a similar hurricane season, I expect Consolidated Water to repeat its record performance.

On April 26, Pentair ( PNR - Get Report) reported a 50% increase in both revenue and earnings, as well as an increase in operating margins. The stock has risen to $44.88 since its Feb. 28 level of $41.44. Not as significant an increase as the others but still handily beating the market.

The fourth stock I recommended, Watts Industries ( WTS - Get Report), has moved from $33.17 to $34.18. The company provides plumbing and filtration systems to third-world countries, and it could potentially have the most significant growth of all four companies. Its fastest-growing unit is the one supplying filtration systems to China, and hence its growth is pegged to the growth of China's economy.

Although all of these stocks have had a nice run in the past few months, I think the group has plenty of room to move upward. I would also recommend (and I plan on doing) continued research in the area to build a more diversified index of these water stocks.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Consolidated Water to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. 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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