Plenty of aspiring investors and traders have taken an interest in the Oscar winning film, The Big Short. The film follows several wall street analysts, including the famous Michael Burry, who predicted the 2008 economic crisis. At the conclusion of the movie, a placard appeared that puzzled many investors. The text states “Michael Burry now only invests in one commodity: water”. Many people do not consider water as a commodity or something to invest in, but the amount of water infrastructure required would surprise the average person. Today, we will be taking a look at how you can personally invest in water through the Consolidated Water Corporation (NASDAQ: CWCO).
The Consolidated Water Corporation is a company that creates clean drinking water from seawater through a process known as seawater reverse osmosis. The company’s strategy is to “to provide water services in areas where (i) the supply of potable water is scarce and (ii) the production of potable water by reverse osmosis desalination is, or will be, economically viable for customers in those areas”. The company established its first plant in 1990, and has plants in several global locations including the Cayman Islands, the Bahamas, and the British Virgin Islands. The company operates through 4 segments. Retail water operations, which supplies government, residential, and commercial consumers with water. This segment generated approximately 41% of the company’s revenues in 2016. The Bulk Water segment supplies water to government owned distributors. Their services segment manages engineering and construction for desalination plants and projects. The company also owns 50% of the voting and equity rights of Ocean Conversion Ltd.
The company’s financials may be a big concerning to some investors. Revenue declined from 66 million to 57 million between 2014 and 2015. However, revenue has seen a slight increase lately, increasing by 1 million from 2016 when compared to a trailing twelve month period. The lack of revenue growth could also be attributed to an increase in operating expenses, which have risen from 15 to 23 million over the last five years. The company has a trailing P/E ratio of 46.3, compared to the industry average of 19.3. The company has a dividend yield of 2.4% (All financial data sourced from morningstar.com).
From a technical standpoint, signals are mixed. As you can see on the chart below, there is a double top, which typically indicates the conclusion of a bull run. The 14 day RSI sits at a 46.42, not indicating either overselling or overbuying. The stock is up 13.92% year to date, slightly below par of the S&P500.
After looking over the fundamental and technical analysis, you may be wondering, why buy this stock? To be frank, the company isn’t stellar in its current state. However, water scarcity and the deterioration of water infrastructure is likely to bring higher profits to water companies in the future. Only about 2.5% of the water in the world is fresh. Even then, only 1% is easily accessible. The global population is growing at an accelerating rate, yet the amount of fresh water is not increasing to meet this demand. In some areas, tap water is not even safe to drink. In addition, we need fresh water to fuel the growth of our crops and farm animals. It is estimated than one hamburger takes almost 630 gallons of water to create by the time it reaches your mouth.
While the potential for growth in CWCO may not be immediately apparent, I still believe this is a good stock to own. Rather than thinking about this as an investment in the company itself, consider this an investment that will pay off based on the severity of the upcoming water crisis. There is a reason Michael Burry, a great investor, chose to put his money in water as a long term investment. Consider buying shares in this small cap water company before a spike in demand brings them great profits.
Disclosure: I have no positions in CWCO and do not plan to open a position within the near future.