Mary-Lynn Cesar, Kapitall: Water systems in the US are aging, and the dual challenges of water scarcity and a growing population are placing more pressure on the existing infrastructure. By 2030, the Environmental Protection Agency (EPA) estimates that the cost of upgrades for the nation’s 73,400 community and non-community water systems will total $384.2 billion. However, funding for these projects remains a concern as decreased water consumption and low monthly rates have diminished the revenue that water utilities rely on to finance their operations.
[Read more from Kapitall: 6 Small Cap Stocks with Insider Buying]The EPA’s estimate comes from its latest Drinking Water Infrastructure Needs Survey and Assessment (DWINSA), the fifth report of its kind released to Congress. The DWINSA is released every four years, and the cost of fixing the nation’s water infrastructure has risen by 69% from the $227.3 billion presented in the 1997 inaugural report. As the price tag associated with the water systems overhaul continues to rise, it’s more imperative that water utilities figure out how to pay for the upgrades. Ceres, a sustainability-focused nonprofit, and the University of North Carolina – Chapel Hill are presently working with water systems nationwide to help them develop pricing that will help fund infrastructure replacement and repairs.
For the following screen, we turned our focus tor water stocks that may benefit from the coming investments in updating the US water infrastructure. We specifically turned our attention to their profits, which we expect to rise as more localities revamp their water systems. To begin, we created a universe comprised of water stocks pulled together from the S&P Global Water Index and the Calvert Global Water Fund. We subsequently narrowed down that list to companies based and operating in the US.
Next, we screened for stocks with rising profits as illustrated by rising diluted normalized earnings per share (EPS) for the past three consecutive years. EPS refers to the amount of a company’s profit allocated per outstanding share of common stock. Diluted normalized EPS differs from normalized EPS because it takes convertible securities into consideration. These convertible securities – which include options, warrens, and convertible preferred shares – can be exercised and lower net income. That’s why diluted normalized EPS tends to be both lower and more conservative than normalized EPS.
We then looked for potentially undervalued stocks as indicated by a low Price to Sales (P/S) ratio. A P/S ratio is a valuation metric that compares a stock’s price to what the company generates in revenue. When a company has a low P/S ratio, it means that its price is cheap in relation to the company’s revenue. If a stock’s P/S is below 1, it can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal.
For this list we screened for stocks with P/S ratios under 2, which means that the company’s market cap isn’t greater than 2x its annual sales.
We were left with three stocks on our list.
Click on the image below to see returns over time. Yearly return data sourced from Zacks Investment Research.Analyze These Ideas: Compare analyst ratings to annual returns for stocks mentioned.