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.

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.