It's been about three months since I last reviewed the performance and potential for companies involved in the commercial potable water industry.
The overall negative story concerning the drought in the western U.S. and the need for potable water production facilities in other parts of the world has continued since I last discussed the subject. Most of the companies involved in this space have performed poorly over the last three months.
Veolia Environnement (VE), and Israel Chemicals (ISCHY) are both down about 10% in that period of time. American States Water (AWR) is down about 3.5%. California Water Service Group (CWT) and American Water Works Company (AWK) are about where they were. The only company concentrated in the sector that is substantively positive is Consolidated Water Co. (CWCO), which is up about 6.5%. Even the large diversified companies with segments in the water space have been mixed, with Lockheed Martin (LMT) up 9%, while General Electric (GE) is down 2.25%. With the exception of Lockheed, the year-to-date performances of all of these stocks has been erratic.
I'm not sure why investors are not showing an interest in this issue, especially given that the percentage of land area in the western states experiencing the worst category of drought, called "Exceptional," has increased from less than 1% a year ago to almost 9% today, and now includes almost the entire state of California. Just three months ago, that percentage was about 5.6%.
Adding to this conundrum is that climatologists believe that a drought-feedback-loop may be developing in the western states as described by the Weather Centre as:
California is experiencing a severe drought right now, leading to absolutely parched soil, and thus extreme wildfires. This dry soil greatly limits the process of evapotranspiration, where moisture in the soil is evaporated into water vapor and lifted into the air to create clouds. Due to the lack of soil moisture, this evapotranspiration does not happen. Consequentially, no clouds are created, meaning the chances for rain to fall from these clouds are severely lowered. When storm systems do stray over California, the dry environment actually ends up cutting down on any helpful rain, as the storm cannot complete the evapotranspiration process, thus cutting off the whole water cycle, and crippling the storm. As a result of the weakened storm, no rain falls, and the drought worsens. This is the feedback loop. A graphical image of this feedback loop is shown below.
Speculators appear to be waiting for empirical evidence of snowfall this winter before moving into these positions. The very long-term trend for these companies and this sector is still very positive, however, as the development of the area is now running into the human carrying capacity constraints of natural resources, the most important of which is water.
The limiting factor of carrying capacity is the availability of the scarcest natural recourse as described in the 19th century by German chemist Justus von Liebig, which became known as the "law of the minimum".
The importance of this now is that irrespective of the immediate issue concerning the drought in the Southwest, the development of the area is causing the limiting factor of water availability and accessibility to be reached. In reality, it has probably already been exceeded, but there has not yet been a real crisis to galvanize awareness of the issue by politicians, investors and the public in general. That point may be approaching, however. If the snowfall this winter does not produce enough water runoff to replenish the reservoirs of Lake Mead and Lake Powell next spring, a simultaneous epiphany by all may be unavoidable.