In an insightful post on the Freakonomics blog last week, economist Steven Levitt, co-author of Freakonomics, dissects a report that claims pesticides found in the water in Indiana have resulted in the poor performance of students on standardized tests if those students were conceived between June and August, when pesticides are at their highest levels.

Levitt argues that the authors of the research paper did not consider the fact that children born during those months might be relatively young for their grades, which could affect their performance on the tests.

Perception is often reality in the stock market, and if people have begun to worry about pesticides seeping into the water in the U.S., then it's time to start looking at the clean-water stocks.

At Stockpickr, we've set up the Freakonomics: Clean Water Stocks portfolio in order to track what is, in fact, a global phenomenon. Worldwide demand for clean water is expected to double over the next 20 years, while the actual supply of water available to people could potentially remain stagnant. Pollution and other environmental issues can create potential pandemics as filth and disease spread.

While Indiana's water supply might actually be safe, the rest of the world could have cause to worry. That will give ample reason for the revenue and earnings of the companies in the Clean Water portfolio -- and the names I mention below -- to ramp up quickly.

Which stocks do you think will benefit from a rise in demand for clean water?
Answer Here

A pure play in the water purification sector is Calgon Carbon ( CCC), whose products are used to remove organic compounds from water, air and various liquids. The company is ramping up its profitability, with analysts expecting the company to go from losing money last year to earnings of 16 cents a share this year and 30 cents a share in 2008.

While Calgon Carbon seems interesting, I prefer some of the larger-cap companies where water purification services are almost a byproduct of the other services they provide. As urban populations around the world increase and the demand for potable water outstrips the supply of services offered to clean that water, I believe these global mega-caps will be in the best position to dominate the industry.

For instance, a company that normally provides its services to the oil and gas industry, but has also developed an expertise in water treatment, is Jacobs Engineering ( JEC - Get Report). This engineering and construction company has a subsidiary devoted to providing the project management, engineering and materials for making potable water available to areas in need. Because of its exposure to the oil and gas industry, Jacobs counts top hedge fund manager T. Boone Pickens among its investors.

Jacobs' earnings are expected to go from $1.61 per share in 2006 to $2.22 per share in 2007 to $2.57 per share in 2008, giving it a forward P/E of slightly above 20 and solid double-digit growth each year. And the company has beaten analyst estimates for the past four straight quarters.

Jacobs is also part of a portfolio called Cramer's Go-To Stocks from a recent "Mad Money" show, where he states that earnings estimates for Jacobs Engineering and others on his list -- including Qualcomm ( QCOM - Get Report) and Foster Wheeler ( FWLT) -- are way too low for the year.

Another large-cap to note here is General Electric ( GE - Get Report), which has a subsidiary that manufactures the chemicals and equipment for water treatment and processing systems. Shares of General Electric are owned by value investors such as Warren Buffett and David Dreman, among others. Click on the above links to see the top holdings of both investors.

Several other portfolios on Stockpickr also provide a diversified look at the water purification space. One is the portfolio for the PowerShares Water Resources ETF. This exchange-traded fund tracks the Palisades Water index, which identifies companies that focus on water treatment.

There's also an international focus in the PowerShares Water Resources ETF portfolio, with investments such as Companhia de Saneamento Basico do Estado de Sao Paulo ( SBS - Get Report), a Brazilian utility.

Another holding is Danaher ( DHR - Get Report), which is also part of the Who Will Berkshire Hathaway Buy Next? portfolio on Stockpickr.

Finally, there's a list of the highest-yielding water utilities, with excellent analysis from stockerblog, who often guest blogs at Stockpickr.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and 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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