In this piece, we will take a look at eight water stocks to invest in.
The water industry is grappling with a unique set of challenges and opportunities as the demand for clean and safe drinking water continues to rise globally. According to the American Water Works Association’s (AWWA) State of the Water Industry Report, there is increasing scrutiny on water quality and access standards, while the sector simultaneously faces pressures from aging infrastructure, water scarcity, emerging contaminants, and evolving cybersecurity threats. The convergence of these issues has made it essential for industry professionals to adopt innovative solutions, foster collaboration, and make strategic investments in people and technology.
This dynamic landscape presents both risks and opportunities for investors looking to enter the water sector. Companies operating in this space are not only focused on ensuring reliable access to drinking water but also on pioneering technologies that address complex issues such as water purification, distribution, and resource management. The report notes that watershed and source water protection, once considered secondary concerns, have now emerged as the top priority for water utilities. This shift reflects a growing recognition of the importance of safeguarding water sources to maintain a sustainable and affordable supply.
In 2024, watershed protection surpassed the perennial challenge of aging infrastructure, which has long been a concern for water utilities. Contributing to this shift are various factors, including the prolonged impacts of climate change, drought conditions, and the threat of contaminants such as per- and polyfluoroalkyl substances (PFAS). PFAS have become a major water quality concern due to their presence in numerous industrial products and their potential to harm public health. Addressing this issue alone is expected to cost the industry nearly $40 billion in capital improvement investments. This underlines the financial and operational hurdles that water companies must overcome, making it a pivotal year for those at the forefront of water resource management.
Despite these challenges, the industry is taking proactive steps to enhance water quality and infrastructure resilience. The Bipartisan Infrastructure Law (BIL) has provided some relief, offering funding to support capital projects, which in turn helps address concerns about aging systems. Utilities are also increasingly implementing water protection plans, with over 61% of respondents in the AWWA survey indicating that they have already integrated or are in the process of integrating source water protection initiatives. This proactive stance demonstrates the sector’s commitment to long-term sustainability.
One of the more critical developments in the water industry is the integration of new technologies. Investments in digital solutions, advanced treatment methods, and green alternatives are expected to more than double over the next one to three years. The adoption of such technologies is seen as “very important” by utility operators and “extremely important” by service providers, according to the AWWA report. The focus is on maximizing the lifespan and performance of existing systems while simultaneously exploring eco-friendly innovations that can bolster water system resilience. This creates a fertile ground for companies specializing in technological advancements to thrive, as they cater to the industry’s growing demand for efficient and sustainable solutions.
Another pressing issue for water industry is cybersecurity. As utilities increasingly rely on digital infrastructure, they become more vulnerable to cyber threats, which pose significant risks to water operations and the privacy of customer data. The survey found that 67% of participants view cybersecurity as a “very” to “critically” important issue, and 82% believe that cyber threats would have a “slight” to “significantly negative” impact on the water sector. Despite these concerns, smaller utilities often lack the resources to enhance their cybersecurity posture, creating a security gap that could lead to severe disruptions. Addressing these vulnerabilities is crucial as utilities look to secure their operations against growing cyber threats.
Looking ahead, water utilities must continue to adapt and innovate to meet the evolving challenges of the industry. Climate change and its associated extreme weather events, for instance, pose a growing threat to water resources and infrastructure. Droughts, water shortages, and unpredictable weather patterns have made it imperative for utilities to adopt robust water management strategies. Consequently, companies that provide solutions for water conservation, infrastructure renewal, and climate resilience are well-positioned to capitalize on these emerging trends.
The water industry’s focus on source water protection, technological innovation, and infrastructure resilience, coupled with its commitment to addressing cybersecurity and climate change, makes it a compelling sector for investors. Companies that are leading in these areas have the potential to drive significant returns while also contributing to the sustainability and safety of global water resources. In the following sections, we explore some of the best water stocks to invest in, analyzing their strategies, performance, and potential for growth in this complex and ever-evolving industry.
Close-up of a faucet gushing out clean, clear water, emphasizing the quality of services provided by the company.
Our Methodology
For this article, we sifted through ETFs and online rankings to identify 15 possible companies that operate in the water industry. We then chose the 8 stocks that were the most widely held by hedge funds, as of Q2 2024. The list is arranged in ascending order of the number of hedge fund holders in each firm.
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08. California Water Service Group (NYSE:CWT)
Number of Hedge Fund Holders: 14
California Water Service Group (NYSE:CWT) is a prominent player in the water utilities sector, providing vital water services across California. As a water stock, California Water Service Group (NYSE:CWT) benefits from a growing demand for water resources, particularly in a state known for its periodic droughts and increasing population. The company’s robust financial performance, evidenced by a notable increase in hedge fund holders, from 8 in the previous quarter to 14 as of Q2 2024, underscores the growing investor confidence in its potential for future growth.
In the second quarter of 2024, California Water Service Group (NYSE:CWT) significantly exceeded earnings expectations, reporting an earnings per share (EPS) of $0.70 compared to estimates of $0.42. This represents a remarkable year-over-year increase from an EPS of $0.17 in Q2 2023. The surge in earnings can be attributed to the company’s strategic rate adjustments approved in the 2021 General Rate Case (GRC), resulting in a 25.9% rise in operating revenue, amounting to $244.3 million. Furthermore, net income for the quarter reached $40.6 million, a substantial improvement from $9.6 million in the prior year.
California Water Service Group (NYSE:CWT) return on equity (ROE) also reflects a solid 10.27%, benefiting from adjustments in the water cost of capital mechanism. Year-to-date, operating revenues surged 58.4% to $515 million, driven by cumulative rate increases of $131.5 million from the GRC and the recognition of $16 million in previously deferred revenues. This trend highlights the company’s effective management of its rate structure and the responsiveness to regulatory opportunities.
The company’s capital expenditures have also been impressive, totaling $214.4 million year-to-date. California Water Service Group (NYSE:CWT) is on track with its $385 million capital budget for 2024, focusing on infrastructure improvements to ensure reliable service delivery. The company’s commitment to sustainable practices, exemplified by its adherence to the decoupling model upheld by the California Supreme Court, positions it well within California’s regulatory framework. With a strong balance sheet characterized by a capital structure of 59.5% equity and a stable credit rating, California Water Service Group (NYSE:CWT) remains an attractive investment in the water utility space, bolstered by strategic growth initiatives and favorable regulatory developments.
07. SJW Group (NYSE:SJW)
Number of Hedge Fund Holders: 14
SJW Group (NYSE:SJW) is positioned as a leading player in the water sector, making it a compelling investment in the water stock category. This categorization stems from the company’s role in providing essential water services and its commitment to meeting stringent drinking water and environmental regulations. As of Q2 2024, SJW Group (NYSE:SJW) has seen an increase in hedge fund interest, with 14 holders compared to 12 in the previous quarter, indicating growing confidence among institutional investors.
In Q2 2024, SJW Group (NYSE:SJW) reported significant financial growth, demonstrating its robust fundamentals. The company achieved a revenue of $176.2 million, marking a 12% increase from $156.9 million in the same quarter of 2023. This growth was primarily driven by rate increases across its local operations, infrastructure recovery mechanisms, and a rise in customer growth. Despite the challenges of higher water production expenses, net income rose to $20.7 million, up 13% from $18.3 million in Q2 2023, showcasing the company’s ability to enhance profitability even in a challenging cost environment.
Diluted earnings per share (EPS) for the quarter stood at $0.64, an increase from $0.58 in the previous year. Furthermore, adjusted diluted EPS reached $0.66, indicating strong operational efficiency and cost management. The company’s year-to-date performance also reflects positive trends, with a revenue increase of 11% to $325.6 million and net income growing 9% to $32.4 million. This consistent financial performance highlights SJW Group (NYSE:SJW) resilience and effective management strategies.
A key driver of future growth lies in the company’s proactive engagement with regulatory bodies and local stakeholders, particularly in California and Connecticut. SJW Group (NYSE:SJW) has successfully navigated general rate cases, securing necessary revenue adjustments to fund critical infrastructure investments, including initiatives aimed at addressing PFAS contamination and enhancing service quality. With plans to invest approximately $158 million in water and wastewater infrastructure as part of its $332 million capital expenditure plan for 2024, SJW Group (NYSE:SJW) is well-positioned to capitalize on ongoing investments in public utilities. In summary, SJW Group (NYSE:SJW) solid financial metrics, strategic focus on infrastructure, and commitment to regulatory compliance make it a compelling addition to any investor’s portfolio focused on water stocks.
06. American States Water Company (NYSE:AWR)
Number of Hedge Fund Holders: 20
American States Water Company (NYSE:AWR) is a notable player in the water sector, primarily due to its significant operations in providing water utility services through its subsidiary, Golden State Water. This focus on water services, combined with consistent performance metrics, positions it as one of the best water stocks to consider for investment.
As of the second quarter of 2024, American States Water Company (NYSE:AWR) reported a decline in consolidated earnings, with earnings per share (EPS) recorded at $0.85, compared to $1.04 for the same quarter last year. However, the adjusted earnings remained steady, reflecting resilience amid challenging conditions. This quarter’s performance was influenced by elevated operating expenses and increased interest costs, as well as favorable regulatory adjustments last year that are not expected to recur. Despite these challenges, revenue from the regulated water segment showed an increase due to recent rate hikes, indicating a positive trajectory for future earnings.
The company’s commitment to infrastructure investment is a crucial factor in its bullish outlook. With an authorized capital investment of approximately $573.1 million over the next three years, American States Water Company (NYSE:AWR) is well-positioned to enhance its service delivery capabilities. This investment not only ensures compliance with regulatory standards but also contributes to the reliability and safety of its water supply.
Additionally, the company recently approved a significant dividend increase, boosting its quarterly cash dividend to $0.46551 per share, reflecting an annualized rate of $1.86. This represents an 8.3% increase from the prior year, emphasizing the company’s ability to generate sustainable earnings growth. The consistent payment and increase of dividends over 70 consecutive years showcase its commitment to returning value to shareholders.
Furthermore, the number of hedge fund holders in American States Water Company (NYSE:AWR) has risen to 20 as of Q2 2024, compared to 19 in the previous quarter. This increase in institutional interest underscores growing confidence among investors.
In conclusion, American States Water Company (NYSE:AWR) presents a compelling investment opportunity, characterized by a strong commitment to infrastructure development, reliable revenue growth from regulatory adjustments, and a history of consistent dividend increases. The fundamentals support a bullish thesis for this water stock, making it a worthy consideration for investors looking to capitalize on the growing demand for water utilities.
05. Aris Water Solutions, Inc. (NYSE:ARIS)
Number of Hedge Fund Holders: 21
Aris Water Solutions, Inc. (NYSE:ARIS) is a significant player in the water management sector, providing innovative solutions for produced water from oil and gas operations. This focus on water sustainability positions the company as a vital resource in an industry increasingly dependent on efficient water management strategies. As of Q2 2024, Aris Water Solutions, Inc. (NYSE:ARIS) has gained traction among investors, with 21 hedge fund holders compared to 17 in the previous quarter, reflecting a growing confidence in its fundamentals.
In the second quarter of 2024, Aris Water Solutions, Inc. (NYSE:ARIS) reported impressive financial metrics, including an adjusted EBITDA of $50 million, marking a 17% year-over-year increase. This consistent growth in produced water volumes, which rose by 5% year-over-year, showcases the company’s resilience and effective operational execution. Despite a sequential decline due to natural volume flowbacks, Aris Water Solutions, Inc. (NYSE:ARIS) anticipates an increase in Water Solutions volumes as the year progresses. The company’s adjusted operating margins have stabilized at $0.46 per barrel, driven by cost reductions through electrification, automation, and improved waste handling processes.
The company’s strategic investments are underscored by its recent letter of intent to construct an iodine extraction facility, which aims to capitalize on the produced water waste stream. This initiative, along with the ongoing desalination pilots in collaboration with major industry players, highlights Aris Water Solutions, Inc. (NYSE:ARIS) commitment to sustainability and innovation. Moreover, the company maintains a robust balance sheet with a net debt of $438 million and a healthy debt-to-adjusted-EBITDA ratio of 2.2 times, well within its target range.
Looking forward, Aris Water Solutions, Inc. (NYSE:ARIS) is poised for continued success with its revised adjusted EBITDA guidance of $195 million to $205 million for the year. With a strong operational foundation, strategic initiatives, and increasing market recognition, Aris presents a compelling investment opportunity within the water stock sector.
Wasatch Micro Cap Value Strategy stated the following regarding Aris Water Solutions, Inc. (NYSE:ARIS) in its first quarter 2024 investor letter:
“Another significant contributor was Aris Water Solutions, Inc. (NYSE:ARIS), an oilfield-services company that manages the water supplies used in energy exploration and production (E&P). The company’s recent pipeline investments allow E&P businesses to increase the amount of water that can be recycled, which significantly lowers costs for Aris’s customers. In Texas, for example, water use is one of the greatest expenses incurred for drilling activities. The stock was down in the fourth quarter of 2023 due to poor operating results stemming from bad weather that prevented crews from making expected pipeline connections. At the time, we were undeterred because we didn’t think those short-term challenges would materially impact Aris’s long-term results. In the first quarter of this year, we were rewarded for our patience as the stock climbed to a 52-week high on the back of excellent earnings, lower capital expenditures and projections for increased cash flows.”
04. American Water Works Company, Inc. (NYSE:AWK)
Number of Hedge Fund Holders: 24
American Water Works Company, Inc. (NYSE:AWK) is recognized as a premier water utility stock due to its role in providing essential water and wastewater services to over 14 million people across the United States. As a leader in the sector, American Water Works Company, Inc. (NYSE:AWK) consistent investments in infrastructure and strategic acquisitions have solidified its position as a top water stock for investors looking for stable and reliable returns.
During the second quarter of 2024, the company reported strong financial results with earnings per share (EPS) of $1.42, compared to $1.44 during the same period last year. Despite a slight year-over-year decline, the results are in line with American Water’s expectations and demonstrate the resilience of its business model. In the first six months of 2024, the company recorded EPS of $2.37, reflecting stable performance amidst varying market conditions. Given these results, American Water Works Company, Inc. (NYSE:AWK) raised its 2024 EPS guidance to the higher end of its range, now expected between $5.25 and $5.30.
The company’s robust capital investment program, amounting to $1.4 billion year-to-date, is a testament to its commitment to enhancing and expanding its service capabilities. This investment contributed to the addition of 43,000 new customers in the first half of 2024 through acquisitions and organic growth. With nearly $500 million in acquisitions under agreement, American Water Works Company, Inc. (NYSE:AWK) outlook for continued expansion remains strong.
Moreover, the company’s strategic focus on regulatory approvals has been highly successful. American Water has completed four rate cases in various states, authorizing 100% of the capital investments made, ensuring continued revenue growth and capital recovery. Such regulatory support is crucial as the company navigates complex investment needs, particularly in states like Pennsylvania, where it has invested $1 billion since its last rate case.
As of Q2 2024, American Water Works Company, Inc. (NYSE:AWK) was held by 24 hedge funds, a decrease from 36 in the previous quarter. This indicates a consolidation in its investor base, possibly due to shifts in market sentiment or portfolio adjustments. Nevertheless, American Water Works Company, Inc. (NYSE:AWK) long-term fundamentals, backed by industry-leading earnings and dividend growth targets of 7% to 9%, make it an attractive pick for investors seeking stable returns from a regulated utility with a strong growth trajectory.
03. Primo Water Corporation (NYSE:PRMW)
Number of Hedge Fund Holders: 31
Primo Water Corporation (NYSE:PRMW) is considered a water stock because it provides high-quality water solutions, ranging from spring and purified water to advanced water filtration products. The company’s diverse product offerings include bottled water, dispenser units, and water filtration systems, catering to residential and commercial customers. As of Q2 2024, the stock is held by 31 hedge funds, up from 27 in the previous quarter, indicating increased institutional confidence.
Primo Water Corporation (NYSE:PRMW) second-quarter earnings report highlights its strong financial performance despite missing EPS expectations. The reported EPS was $0.09912, lower than the expected $0.25, but the overall fundamentals remain positive. Total revenue for the quarter came in at $485 million, up 7.6% year-over-year, driven by a balanced mix of 3.1% volume growth and 4.5% pricing growth. This revenue growth was fueled by organic growth of 6.6%, reflecting healthy consumer demand and strength across Primo’s broad water solutions portfolio.
The company’s adjusted EBITDA surged to $113 million, an impressive 15% increase compared to the prior year. Notably, the EBITDA margin expanded to 23.3%, exceeding the high end of management’s guidance, which demonstrates Primo Water Corporation (NYSE:PRMW) ability to control costs and enhance profitability in a challenging economic environment. This margin expansion, coupled with a higher rate of free cash flow generation, underscores the company’s robust financial health and operational efficiency.
Primo Water Corporation (NYSE:PRMW) growth is also supported by strong demand for its premium product offerings like Mountain Valley Spring water, which saw an 87% increase in retail revenue. The company’s focus on sustainability and responsible water source management further strengthens its market position as a leading player in the North American water category.
The acquisition of BlueTriton Brands, which is expected to bring in significant synergies and enhance Primo Water Corporation (NYSE:PRMW) market share, is another catalyst for future growth. As consumers continue to prioritize healthier lifestyles and sustainable water solutions, Primo Water Corporation (NYSE:PRMW) is well-positioned to benefit from these long-term trends. With its balanced revenue streams between residential and commercial customers, Primo Water Corporation (NYSE:PRMW) remains a compelling investment in the growing water sector.
Carillon Chartwell Small Cap Value Fund stated the following regarding Primo Water Corporation (NYSE:PRMW) in its Q2 2024 investor letter:
“Primo Water Corporation (NYSE:PRMW) markets and distributes water, water dispensers, and filtration systems to residential and commercial customers across the United States. Stronger results driven by better volumes, pricing and margins, along with a return to growth in dispenser placements, excited investors. The company was also rewarded for announcing the sale of its European business. Late in the quarter the company announced a combination with another large water company that should result in sizeable integration synergies.”
02. Pentair plc (NYSE:PNR)
Number of Hedge Fund Holders: 40
Pentair plc (NYSE:PNR) is considered a water stock due to its extensive focus on water solutions, such as flow and filtration systems, which are essential for water purification and management across residential, commercial, and industrial applications. As of Q2 2024, Pentair is held by 40 hedge funds, an increase from 39 in the previous quarter, demonstrating rising investor interest in the company.
Pentair plc (NYSE:PNR) reported strong Q2 2024 financial results, beating expectations and showcasing the strength of its water-centric business. The company posted an earnings per share (EPS) of $1.22, surpassing the anticipated $1.15. Revenue reached $1.1 billion, reflecting a 2% year-over-year increase. The growth was supported by gains in the Pool and Commercial segments, partially offset by a decline in the Residential segment due to macroeconomic pressures.
One of Pentair plc (NYSE:PNR) notable strengths is its consistent margin expansion. In Q2, adjusted operating income increased by 16% to $271 million, while return on sales (ROS) expanded by 310 basis points to 24.7%. This achievement was driven by effective cost management and strategic pricing initiatives, underscoring Pentair’s ability to optimize profitability across its diverse portfolio. Additionally, adjusted EPS grew 18% year-over-year, further highlighting the company’s robust financial health.
Pentair plc (NYSE:PNR) Pool segment experienced impressive growth, with sales rising 17% year-over-year to $392 million. This marks the first time in eight quarters that the Pool segment returned to growth, driven by strong demand for aftermarket products and sustained consumer interest in pools. Segment income for Pool rose 27%, and ROS expanded 270 basis points to 34.1%. This performance indicates Pentair plc (NYSE:PNR) ability to capitalize on the trend of outdoor leisure activities, even amid economic headwinds.
Looking ahead, Pentair plc (NYSE:PNR) has raised its full-year 2024 EPS guidance to $4.25, reflecting confidence in its growth trajectory and strategic initiatives. With favorable secular trends like increased awareness of water quality, infrastructure upgrades, and sustainability concerns, Pentair is well-positioned for long-term growth. The company’s disciplined capital allocation strategy, which includes stock buybacks and consistent dividend increases, further enhances shareholder value. Overall, Pentair plc (NYSE:PNR) focus on innovation and operational efficiency make it a compelling choice for investors seeking exposure to the water industry.
01. Xylem Inc. (NYSE:XYL)
Number of Hedge Fund Holders: 50
Xylem Inc. (NYSE:XYL) is a major player in the water industry, providing innovative solutions for water infrastructure, smart metering, and water treatment. It is widely regarded as a water stock due to its focus on water-related technologies and services, which are essential in addressing global water challenges. As of Q2 2024, the stock was held by 50 hedge funds, up from 45 in the previous quarter, indicating increasing institutional confidence in its long-term growth potential.
In the second quarter of 2024, Xylem Inc. (NYSE:XYL) reported strong financial performance, surpassing analysts’ expectations. The company posted earnings per share (EPS) of $1.09, beating the consensus estimate of $1.05. This 11% year-over-year EPS growth highlights the company’s robust profitability and effective cost management. Total revenues rose by 26%, with organic revenue increasing by 9%, driven by strong demand in its Measurement & Control Solutions (MCS) and Water Infrastructure segments.
Xylem Inc. (NYSE:XYL) EBITDA margin for the quarter was 20.8%, up 170 basis points compared to the prior year. The company achieved a solid margin expansion thanks to increased volume, price realization, and productivity gains. The MCS segment, in particular, delivered an impressive performance, with revenue up 26% and EBITDA margins increasing by 700 basis points. This growth was fueled by higher demand for smart metering solutions and backlog execution, reflecting Xylem Inc. (NYSE:XYL) ability to capture market opportunities effectively.
Moreover, Xylem Inc. (NYSE:XYL) integration of Evoqua Water Technologies is progressing well, leading to cost synergies and enhanced commercial capabilities. The combination is expected to generate $100 million in cost synergies by the end of 2024, positioning the company for further margin expansion. Additionally, Xylem Inc. (NYSE:XYL) balance sheet remains strong, with a net debt-to-adjusted EBITDA ratio of 0.7x, and its year-to-date free cash flow increased by 200% compared to last year, reflecting improved cash flow generation. Given its solid financial position, strategic acquisitions, and a positive outlook for revenue and margin growth, Xylem Inc. (NYSE:XYL) is well-positioned to benefit from ongoing demand for water solutions. The company’s strong fundamentals make it an attractive investment for those looking to gain exposure to the water industry.
Artisan Mid Cap Fund stated the following regarding Xylem Inc. (NYSE:XYL) in its first quarter 2024 investor letter:
“Notable adds in the quarter included Xylem Inc. (NYSE:XYL), NVR and Equifax. Xylem is a global leader in water technology across pumps, smart meters and treatment services. More than 80% of the company’s sales come from markets where it maintains the No. 1 or No. 2 market position. Xylem’s pumps business (sold primarily to utilities) is sticky and profitable, providing capital to invest in innovative solutions, such as smart meters. In mid-2023, Xylem completed the acquisition of Evoqua, giving it a leading position in the US water treatment business. We believe the company is at the start of a compelling profit cycle. Smart meter sales are recovering from supply chain issues, cost and revenue synergies from its acquisition are in the early innings, and a newly hired and well-respected CFO should help catalyze long-awaited margin expansion. Meanwhile, rising demand for solutions to water sustainability challenges should be a trend for years to come. Financial results were thesis affirming, including revenue, margins and earnings that exceeded expectations. We decided to bring the position into the CropSM of the portfolio.”
While we acknowledge the potential of XYL to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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