It's been about three months since I last addressed the water infrastructure companies in the column, "Water Investing Finally Comes In From the Desert."
In that column, I referenced the positive turn in the sector earlier this year. It's accelerated since, so this is a good time to discuss again.
The magnitude of the fresh and potable water crisis that is still principally a West Coast issue in the U.S., but also a global one, is finally beginning to resonate with investors.
For the past few years, even as empirical evidence of the severity and ramifications of the West Coast drought have been growing, the prevalent meme by investors, politicians and residents of the affected areas has been that this too will pass with a strong winter snow season, and that betting against that was not prudent.
With California entering its sixth year of drought, the most severe in its history, some are finally beginning to consider the need for real action on the part of governments in the area to ensure water access in case the drought continues.
The principal actions taken to date have been temporary water conservation measures intended to reduce consumption until the winter snow packs fill the reservoirs again, principally Lakes Mead and Powell.
I discussed the distribution of water to the West Coast states from these two reservoirs in the column "Investing in the Most Basic of Needs" two years ago.
Since then, the water inflows and levels at both have deteriorated further, but most severely at Lake Mead, which is at about 36% of capacity and its lowest level since being filled in 1941.
Regardless of how those wars play out among the states in the near term, the most logical corrective measures to ensure that potable water access is not interrupted, which is inevitable if the drought continues, is to build desalination plants and the associated distribution systems required to supply water from the Pacific to at least Southern California, and most probably the entire West Coast.
Of all of the water on the planet, only about 3% of it is fresh water. The other 97% is salt/ocean water. Of the 3% that's fresh, 70% of it is glacial, 29% is underground, and only 1% flows through rivers and streams, such as the Colorado River feeding Mead and Powell.
There is nothing current technology can do to cause the decline in fresh water flowing through rivers and streams to reverse.
That leaves desalination as the only viable solution, and that will require massive infrastructure investment, which will also require federal funding as the financial expense will be far too great to be funded completely by state and municipal borrowing.
It will likely be several years before federal resources are politically viable, though, and during the interim state and local governments will and are having to pursue a patchwork of water conservation measures that are proving to be a boon for the water infrastructure companies.
I think that will continue and accelerate from here.
The safest way to speculate specifically on water infrastructure is through the ETFs I focused on in the article from three months ago, all of which are at or near 52-week highs, and have been rising since the first quarter: PowerShares Water Resources Portfolio (PHO) , PowerShares Global Water Portfolio (PIO) , Guggenheim S&P Global Water ETF (CGW) and First Trust ISE Water ETF (FIW) .
An even more conservative strategy would be to invest in the largest government contractors that have water infrastructure development divisions, General Electric (GE) and Lockheed Martin (LMT) . (General Electric and Lockheed Martin are part of TheStreet's Action Alerts PLUS portfolio.)
The individual companies, however, especially those in the U.S., are performing even better. Of them, I advise considering American Water Works (AWK) , Xylem (XYL) , Flowserve (FLS) and Mueller Water Products (MWA) .