Wind and solar will continue to get the lion’s share of the headlines as it relates to the world’s clean energy transition. However, it may also be time for investors to consider investing in clean water stocks as part of a balanced clean energy portfolio.
Concerns about water quality will drive the growth in clean water stocks. You may not remember the exact number from your school days, but 70% of the earth’s surface is covered in water. Supply is not the primary issue.
That issue would be quality. Only about 1% of the world’s water is immediately available to be consumed by humans. Therefore, water treatment will remain a major growth driver for water stocks. This generally takes the form of water purification and water monitoring.
Also, there are opportunities as work is done to repair an aging water infrastructure. The 2021 Infrastructurd Bill passed by the United States Congress includes $55 billion for upgrading the nation’s water infrastructure.
Fortunately, investors have several options to choose from when searching for clean water stocks. Here are three choices that give investors the ability to fill out a clean energy portfolio.
Consolidated Water (CWCO)
If you have an appetite for small-cap stocks, Consolidated Water (NASDAQ:CWCO) is one to put on your radar. The company is addressing the need for both water treatment and desalination. Both markets are expected to show a strong compound annual growth rate (CAGR) throughout the next five years.
The California-based company does busines in a variety of international markets. In the U.S., its primary market is in the southwest. Not surprisingly, this is an area where water scarcity is a growing concern.
Consolidated Water has a strong balance sheet, and is showing strong revenue growth. In its first quarter 2023 earnings report, the company posted a 68% year-over-year increase in revenue. However, that’s not translating into earnings growth at this time. The company is consistently profitable, but it expects to post a slight year-over-year decline in earnings. Still, analysts project the stock to grow by approximately 20% this year.
Pentair (NYSE:PNR) is next on this list of clean water stocks. The company develops solutions for water filtration that also address the need for sustainability. The company launched its Pentair Rocean Reservoir home water filtration system. In addition to reducing or removing 76 contaminants, this will help address the pollution problem that plastic water bottles present.
The company is still largely known for its pool equipment business. That was responsible for the company’s strong revenue growth in 2021. In 2023, Pentair faces tough comparisons, but revenue is holding up so far.
PNR stock may present investors with an interesting discrepancy. Specifically, the company’s earnings are projected to grow by 10% this year and it has a fair valuation with a forward P/E ratio of just 18x.
Normally earnings growth precedes stock price growth. However, analysts are forecasting the PNR stock price to fall by 3%. Even if the stock price growth doesn’t materialize right away, you get a sustainable dividend that has been increasing for 48 consecutive years, and comes with a 29% payout ratio.
As I mentioned in the introduction, the world’s water infrastructure is in desperate need of an overhaul. A leading research firm sets that this maintenance will continue to grow at a rate of 10% every year. That’s where Xylem (NYSE:XYL) comes into play.
Xylem is a water technology company that makes products to help maintain equipment at wastewater treatment plants. One of the common problems the company addresses is leaky pipes. This is important because the average water main in the U.S. may be up to 50 years old. That being said, the company’s business isn’t limited to the U.S.In fact, it does business in more than 150 countries.
Of the clean water stocks on this list, Xylem is the one with the highest valuation. It’s trading at 33 times forward earnings. Still, the company is projected to have yearly earnings growth of 10%, and analysts are only projecting a 3% increase in the XYL stock price.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.