Small-Cap Water Companies

Small-Cap Water Companies: Two Massive Opportunities You
Can’t Afford to Miss
A Daily Reckoning Whitepaper Report
By James Boric,  Penny Sleuth(Sign up FREE today!)

Listen up. This could easily prove to be the most important Penny Sleuth alert I write to you for the next year — possibly longer. Two massive profit opportunities are developing right now. Both trends are early in the profit cycle. So you still have time to get in on the action. But I wouldn’t wait too long.

Here’s the deal…

At a recent closed-door Agora Financial editorial meeting, Chris Mayer (the editor of the successful Capital & Crisis) and Eric Fry (editor of Rude Awakening) couldn’t stop talking about two of the Earth’s most precious commodities. And no, they are NOT gold and oil.

These two natural resources are far more valuable than both gold and oil combined. Every industry in the world depends on them in some way — directly or indirectly. And every person needs them to survive.

Small-Cap Water Companies: The Demand for Water is Rising

The first valuable commodity is fresh water.

There are more than 6.5 billion people living on Earth today. That’s approximately four times as many as at the start of the 20th century. And the United Nations predicts that number will swell to over 10 billion by 2100. Whether you are born in Africa, Asia or the good ole US of A, one thing is certain: Everyone needs water to survive. Problem is, 97% of Earth’s water isn’t suitable for drinking.

As Chris pointed out in Capital & Crisis, “While water largely covers this hardscrabble little planet of ours, less than 3% of it is fresh water. And the presence of pollution and disease has made much of that water undrinkable. Unlike with oil, no amount of technological wizardry can replace water.”

It doesn’t take a genius to realize that as demand for water increases (thanks to a rise in the population) and supply either remains flat or decreases (no one is “making” more water), the price will rise. And it’s that simple but spot-on logic that prompted Dan Denning of Strategic Investment to dub water one of the top investment ideas for 2006.

To prove just how valuable water already is, Dan wrote, “In mid-December, the premiers of Quebec and Ontario, along with the governors of eight U.S. states, signed a pact that will ban all large-scale water diversions from the Great Lakes basin. That will prevent fully 20% of the total fresh surface water of the Earth being exported by pipeline to thirsty states like California, Arizona or Nevada. The eight states that border the Great Lakes — Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania and Wisconsin — have seen the future. future. And the future is that fresh surface water is going to be more and more valuable as it gets more and more scarce.”

Translation: Entire states are already starting to protect their fresh water supplies. They know what a valuable commodity they are sitting on.

So the question is, how can you invest in this trend and make a nice little (possibly even quite large) profit?

Small-Cap Water Companies: Small-Cap Water Plays Ready to Burst

There are several small-cap water plays on the market right now — from water utility companies to equipment companies and others. Here’s a list of some of the top small-cap companies on the market today:

1) American States Water Company (AWR:NYSE), market cap of $526 million. AWR is a public utility company. It purchases, produces, distributes and sells water in California. It serves approximately 250,000 water customers.

2) Southwest Water Company (SWWC:NASDAQ), market cap of $333.4 million. SWWC’s services include water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services.

3) Layne Christensen (LAYN:NASDAQ), market cap of $443 million. LAYN is a drilling services company. It serves four principal markets: water resources, mineral exploration, geoconstruction and energy.

4) Franklin Electric Co. (FELE:NASDAQ), market cap of $1 billion. FELE designs, manufactures and distributes groundwater and fuel pumping systems, electronic controls and related parts and equipment. It manufactures submersible water and fueling systems motors used to pump fresh water.

5) Watts Water Technologies, Inc. (WTS:NYSE), market cap of $1.0 billion. As MSN Money reports, WTS “is a global manufacturer of safety and flow control products for residential and commercial plumbing, heating and water quality markets. The company’s product lines include backflow preventers for preventing contamination of potable water caused by reverse flow within water supply lines and fire protection systems…”

6) California Water Service Group (CWT:NYSE), market cap of $777 million. The company distributes water and provides water-related utility services in California, New Mexico, Washington and Hawaii.

7) Calgon Carbon Corp. (CCC:NYSE), market cap of $271 million. CCC provides services, products and solutions for purifying water and air.

8 ) Consolidated Water Company (CWCO:NASDAQ), market cap of $266.2 million. CWCO uses reverse osmosis technology to produce fresh water from seawater. It supplies water to customers in the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas.

If and when demand for water does increase (which it must), the companies I listed above should benefit. In fact, I firmly expect to write more about these companies in the months to follow. Stay tuned…

Small-Cap Water Companies: A Small But Sweet Amount of Sugar

Of course, water isn’t the only commodity that is hot right now. There is another raw material making a few investors a lot of money. And like water, supplies are low and demand is high.

I’m talking about sugar.

Thanks to a smaller-than-expected harvest in Brazil, a record hurricane season here in the States, tightening supplies in Asia and a drought in Thailand, sugar prices are at 24-year highs.

Barron’s has reported, “Importing nations may have little choice but to pay higher prices for sugar in the first half of 2006, after whittling down inventories in recent years…World 2005-06 sugar consumption should surpass output by 1.5-2 million tons after Brazil’s disappointing center-south harvest, the International Sugar Organization said in early January.”

This recent sugar high has been sweet for investors. And no one was on this trend earlier than my buddy Chris Mayer. Last year, Chris recommended his Capital & Crisis readers add shares of small-cap Imperial Sugar Company (IPSU:NASDAQ) to their portfolios. At the time, Imperial (which has been in business for over 160 years) was trading for less than its tangible assets. It had $4 per share in cash. And it traded for $11.44.

As of yesterday’s close, Imperial was trading for $25.39 — up 121.9%. And with sugar prices still on the rise, there’s no saying how much higher this stock will go.

There aren’t any more obvious small-cap sugar companies on my radar screen right now. But over the next few weeks, I’ll be looking hard to find a way to get in on this trend. As always, I’ll let you know what I find.

Until then, one thing is for sure, both water and sugar are hot commodities right now. And as small-cap investors, you would be wise to pay serious attention to them.

Good investing,

James Boric

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Here are some other Penny Sleuth articles about Small-Cap Water Companies:

And Now, Hydropolis by Jonathan Kolber
Hauser sounds more like a missionary than a traditional hotelier, with remarks like, ‘You can’t help being fascinated [by the sea] and you start caring about all the associated issues. Humans consist of 80% water, the Earth consists of 80% water; without water, there is no life’…”

The Future of Food by Jonathan Kolber
For instance, polyphenolics are natural antioxidants produced by berries and corn. In plants, they help fight off pests. In our diet, they help prevent age-related decay, such as heart disease. Research at the University of California, Davis, recently found that organic berries and corn have up to 58% more of these precious substances…”

Not a Drop to Drink by Greg Guenthner
The United States Geological Survey recently released a report on volatile organic compounds (VOCs) in the country’s ground water and drinking water. And while VOCs were not detected in many of the nearly 3,500 wells sampled in the study, ‘VOCs were detected in most aquifers throughout the Nation, and were not limited to a few specific aquifers or regions’…”

Seeing Through a Membrane, Clearly by Jonathan Kolber
“…Reverse osmosis, for example, relies on a wonderful membrane that removes salt from water, thereby allowing it to be processed like lake water. It’s good at purifying water so it becomes drinkable. However, the membranes tend to get clogged, and the energy requirement is a staggering 35-50% of the total system cost

The Water Crisis by Greg Guenthner
Here’s a short refresher: One out of five people in the world are without access to safe drinking water and half of the world’s population lacks adequate water purification systems. On top of this, the United States’ aging infrastructure will need a $1 trillion overhaul over the next 20 years…”

Here are some resources about Small-Cap Water Companies:

Capital & Crisis Chris Mayer’s stock recommendation service, based on finding value for the long run.

PowerShares The Water Resources Portfolio, based on the Palisades Water Index.

The Rude Awakening A daily diet of worthwhile investment insights, presented in the context of financial market facts and Wall Street fictions. Investment research and industry news, plus a list of publicly traded water companies.

Waterbank Water investments, news about water, investment opportunities and more.

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