No Drought On Small-Cap Water Companies

The inevitable showed up in my mailbox the other day: a notice from the water department that we were in a Water Supply Response Level 2 condition, meaning that consumers had to cut down 20% on usage in order to meet demands.

I live in South Orange County California, and I must admit most of my neighbors don’t know squat about what outdoor plants need watering, at what interval or duration. They just haphazardly set the timer and let it ride…meaning sprinklers could run for hours every day, or in the heat of the day when most of it evaporates.

There have been so many times when I’ve walked out to get the newspaper (yes, I still read one) and a stream has formed in the gutter because a neighbor or two insist on over-watering their foliage and therefore water the streets as well.

Then there’s the guy who stands outside his house wearing nothing but a Speedo watering his concrete landscape.

Doesn’t paint a pretty picture of the level of awareness in my middle-class hood. Out here it basically doesn’t rain from May to December, so we can’t rely on Mother Nature to do her part.

I know we’re not alone out here with our water woes; 60% of the U.S. is experiencing a drought. The U.S. government has projected that 36 states will run into water shortages in less than five years.

One of the top water infrastructure plays comes from a leader in “fluidics” systems and components for everything from medical to fire and rescue. IDEX Corp. (NYSE: IEX) a company with a solid 9% growth in orders over 2008. They trade at a premium 13x multiple, but may be worth your while.

Another smaller market cap company is Layne Christensen (NASDAQ: LAYN), who produces water infrastructure as 75% of their business. One thing that is a net positive about Layne is that they have about 85% of their sales coming from the U.S., where stimulus packages are plentiful.

In another niche of water control is Calgon Carbon (NYSE: CCC), which provides products and services to purify water and air. It manufactures granular activated carbon for removing organic compounds from water, air, and other liquids and gases. It is a solid, $634 million company with good fundamentals, a respected brand name and a moderate P/E around 18.62.

Watts Water Technologies (NYSE: WTS) is another good choice as a major leader in the manufacturing of valve and flow-control products. It has doubled its business in the past five years, mainly through acquisitions and via expansion overseas, where more than 30 percent of its business now comes from Europe and China.

Any one of the above could quench your thirst for profits.