7 Best Water Stocks to Buy Now

1 dec. 202217:06 UTC

Water stocks are an interesting breed. Water is an essential good, and there are lots of companies that make money off of water in one way or another.

However, it’s not always clear how to get exposure to the sector, and it can be hard to find companies that are solely exposed to water. That said, for water stocks, there are three main categories to look for.

There are water utilities, which deliver water to end users. There are industrial distributors, which sell goods such as plumbing and water infrastructure equipment. And there are more broadly diversified companies that have some division devoted to some specific water-related good, such as smart meters.

Add it all up, and there’s a decent grouping of water-related stocks for investors to look at. These seven water stocks are among the most promising heading into 2023.

Best Water Stocks: Pentair (PNR)

Pentair (NYSE:PNR) is a worldwide leader in water filtration with operations in more than a dozen countries. The firm offers industrial filtering, pumps, and flow solutions. It also has a swimming pool business, where it makes pool equipment and filters.

Investors may think the good times are over for PNR stock. After all, the surge in swimming pool-related sales that started in 2021 is unlikely to last. That sort of pandemic-driven spending on home improvement has rapidly reversed itself recently across a number of housing products.

That said, investors shouldn’t write off Pentair as simply a cyclical play on leisure dollars. The industrial business is a powerful one and is far less impacted by economic cycles. The need for clean water isn’t going anywhere, and Pentair will enjoy rising long-term demand in that market regardless of near-term swings in the pool business.

Even after a recent rebound, PNR stock is still down more than 35% over the past year. This has pushed shares of the firm down to less than 13 times forward earnings.

Xylem (XYL)

Xylem (NYSE:XYL) is one of the better pure-play water industry stocks out there. That’s because the company has built a broad range of products, making it a one-stop shop for the water industry. Xylem supplies water measurement, infrastructure, storage, testing, and efficiency equipment among other goods.

The basic idea is that a customer, such as a water utility, can buy everything it needs from Xylem instead of having to go to a variety of different vendors for each product. This creates efficiencies of scale with sales and marketing.

Investors have long loved Xylem’s mission and business plan, leading to a persistently high valuation. Xylem shares had dipped significantly earlier this year but have now recovered nearly all their losses after improving earnings results. That being the case, Xylem shares are now going for around 40 times earnings. That’s not the most attractive starting price, however, quality doesn’t usually come cheap for a long-term growth story in a key sector such as water.

Best Water Stocks: Roper Technologies (ROP)

Roper Technologies (NYSE:ROP) is a broadly diversified company that makes software solutions for a wide range of industries. The company started as Roper Industries, but changed its name to reflect the shifting focus into making industrial software rather than lower-margin industrial goods.

Given Roper’s roots as an industrial company, it arguably trades at a lower valuation than companies that are viewed as pure-play software businesses. However, Roper today gives investors an impressive array of software assets covering power plant management, insurance, graphic design, and K-12 school management, among others. ROP stock is now trading for around 30 times earnings and eight times revenues, which makes for a reasonable entry point for this software firm which has historically grown at a double-digit compounded rate.

As it pertains to water specifically, Roper owns Neptune Technology Group, which has been a leader in developing automatic meter reading (AMR) and advanced metering infrastructure (AMI). The company states that its technology is used in reading more than 72 million meters per month.

Ferguson (FERG)

Ferguson (NYSE:FERG) is an industrial distribution company. In recent years, the company has exited its United Kingdom business while continuing to build its focus on the North American market. That’s been a good move given the relative difference in economic strength in those places.

Ferguson primarily distributes goods for the housing market such as plumbing, water infrastructure, and heating, cooling, and ventilation.

Understandably, investors are concerned about a potential downturn in Ferguson’s business given the slumping housing market. However, it’s important to note that the repair and remodel market should continue to show significant strength even if new home builds were to fall for a meaningful period.

FERG stock hasn’t shown much strength yet despite the recent market rally. FERG stock is still down 35% year-to-date. At this price, shares are going for less than 13 times forward earnings making this a holiday bargain.

Best Water Stocks: Ecolab (ECL)

Ecolab (NYSE:ECL) is the world’s largest company focused on sanitation, hygiene, and water treatment. It is roughly five times as large as its next biggest rival, Diversey (NASDAQ:DSEY).

Ecolab’s size allows it to be a leading service provider to a broad range of industries. It helps customers with water treatment and safety, workplace hygiene, pest removal, textile care, and so on.

Unfortunately for the company, many of the firm’s customers really struggled during the pandemic. As cruise lines, hotels, universities, restaurants, and so on closed down, this hurt Ecolab’s profitability. Things are recovering now, with the company once again posting double-digit revenue growth. The global travel recovery should continue to help matters. And ECL stock is still down sharply for 2022, offering investors a solid entry point.

Essential Utilities (WTRG)

Essential Utilities (NYSE:WTRG) is a large water utility. Until 2020, it was Aqua America and was a pure-play water operation. At that time, however, it bought People’s Gas which diversified the business. Regardless the gas unit is smaller than the prior Aqua America operations.

The combined firm is a paragon of reliability. The company is a Dividend Aristocrat, meaning that it has increased its dividend for more than 25 consecutive years. With a starting dividend yield of 2.4%, WTRG stock may not jump off the screen. However, a solid starting yield like that with annual additional increases adds up over time.

Given that Essential Utilities serves mature markets with modest growth prospects, the company’s earnings are unlikely to ever soar overnight. However, particularly with more smart acquisitions, the company can continue to steadily grow its operations and thus keep the dividend faucet flowing.

Best Water Stocks: Global Water Resources (GWRS)

Global Water Resources (NASDAQ:GWRS) is a small Arizona-based water utility. It primarily serves a handful of towns and communities in the greater Phoenix and Tucson metro areas.

Due to quirks of Arizona law, there has historically been a large number of tiny water utilities only serving one subdivision or other such areas. Global Water has acquired more than half a dozen of these other water utilities in recent years, expanding its footprint.

Arizona has one of the fastest-growing economies and populations in the country due to its strong economic prospects and sunny weather. Thus, Global Water’s strategy should pay off as more and more new homes and businesses are built in the company’s service area. Many water utilities tend to be stodgy companies with limited growth prospects. Global Water’s unique strategy should give investors a water stock to own with more growth upside than its average peer.

On the date of publication, Ian Bezek held a long position in ROP, ECL, WTRG, GWRS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.