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Water World

05/05/2006 12:00 am EST


Neil George

Editor, Profitable Investing

From stocks to bonds, income to growth, and global to domestic, I’m always awed by the breadth of expertise shown by Neil George, editor of Personal Finance, the Inner Circle, and By George! Here ‘s a look at one of his favorite long-term investment sectorswater.

"A s countries start moving from third to second or first world status, expanding agricultural, hygienic, and consumer demand means increased water consumption. In short, there's a war for resources in the offing, and water is at the center of it all. You'd better be ready. The main issue for the industry: We have lots of water, but not enough that we can safely drink.

"The real way to profit from the water factor is to get on board with the companies that not only provide fresh water, but also treat contaminated water for increased demand. Most aren't US based. But if you're willing to look at the biggies behind the tap, investing in these global water players should position you well for one of the biggest, lesser-known plays out there today. The Mecca of water is the city along the banks of the Seine, Paris, which is home to three of the biggies in the water world.

"First is Suez (SZE NYSE). The company has been around since France was in Egypt, and it was one of the lead contractors in building the Suez Canal. Even after Waterloo, it continues to operate on a global scale. Through development of its own water and other resource and energy businesses and acquisitions, its built itself into one of the world's biggest water and energy companies.

"It now operates on all continents and dominates its locally controlled water markets. Yet although it's the king, it still trades like a pauper at a mere 0.4 times trailing revenues. The reason is simple: Most investors aren't fully aware of its true assets. Also, Suez is like other big Europeans, reforming its focus onto what makes the most money. And that means water.

"Next is Veolia (VE NYSE), a water company like Suez that predates Napoleon. Having been spun off from media and utility conglomerate Vivendi, Veolia has changed its name to reflect its true business. And that business is providing water and water services in more than 100 nations. Like Suez, Veolia now has to make investors aware of its existence and its assets and revenues, which have been climbing at swift paces of recent. Yet it's still trading at huge discounts.

"If you want to own a local US water company, it should be Northeastern-based Aqua America (WTR NYSE). It operates in more than a dozen states and draws water from both its own rights and those based on long-term grants and contracts. Although it’s a good buy, it comes at a great expense—it trades at a whopping five times-plus trailing sales. Meanwhile, Consolidated Water (CWCO NASDAQ) makes salt water potable in tourist-rich islands in the Caribbean (most of the world’s water is salty). It's as expensive, but will only get more so as fresh water becomes scarcer.

"Bottled water also commands a thirsty market. While Coca-Cola and Pepsi have their hands in this game, Nestlé (NSRGY Other OTC) is king in the bottled water business. The company controls key brands—i.e., Perrier, Arrowhead, and others—that dominateglobal bottled water. Nestlé not only owns water reserves in Europe, but throughout the world. And it's well versed at catering to local market needs, from the first tier to the bottom tier. What's more, you also get a great collection of food and consumer goods."

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