On Fox Business last week, Graham and Buffett-style investor Mario Gabelli (Trades, Portfolio), CEO of GAMCO Investors, said he was optimistic about the U.S. economy and listed water as a sector in which he had particular interest. Dr. Michael Burry, after spotting the systemic threat to the global financial system, also started investing in water post-financial crisis, according to the movie featuring him, "The Big Short."
Making the sector more important is the relative safety of boring public utility stocks, the forecast increase in scarcity for the crucial resource and the instances of contaminated public water supplies. In January, an annual report from the World Economic Forum listed water crises and the third greatest risk facing the world and ninth most likely to happen.
“Climate change risk will, in practice, flow through either excess or lack of water with the potential for severe impacts to societies globally,” the report said.
These combined factors helped seven water stocks reach one-year highs in February. They also contributed to the Dow Jones Utility Index (DJU) becoming the best-performing sector of the Dow Jones Industrial Average in 2016. It has gained 15.7% year to date compared to 1.8% for the Dow.
Publicly traded water utility stocks thus far occupy only a relatively small portion of tracked investors’ funds, with the most held, American Water Works Co. (AWK, Financial), appearing in 2.9% of portfolios, according to GuruFocus data.
Gabelli’s portfolio lists several of these stocks in tiny amounts, though his most recent portfolio dates to Dec. 31 and may have changed his positioning in the sector since then. His recent record of selling these stocks also suggests he finds the subset of the industry less appealing. He holds several stocks related to water, but not necessarily public utilities, in larger amounts.
The top water utility stocks in Gabelli’s portfolio at the end of the fourth quarter were: SJW Corp. (SJW, Financial), Middlesex Water Co. (MSEX, Financial), York Water Co. (YORW, Financial).
Gabelli held 363,467 shares of SJW Corp. at fourth quarter-end, a 0.07% portion of his portfolio and 1.78% of the company’s outstanding shares. He has also reduced his holding of the company in each quarter since the third of 2014. The company’s shares price has jumped 24.7% year to date. SJW is a holding company with four subsidiaries: San Jose Water Company, SJW Land Company, SJWTX Inc. and Texas Water Alliance Limited. The various subsidiaries provide regional water service, develop new water projects and develop land. SJW Corp. has a five-year average revenue growth rate of 16.2%, P/E of 19.6 and 2.2% forward dividend yield.
Gabelli’s next largest water utility holding, Middlesex Water Co., occupied 0.01% of his portfolio as 73,114 shares representing 0.45% of its shares outstanding. The company’s stock price rose 20.1% year to date. Middlesex Water operates water and wastewater utility systems for municipalities and private clients throughout New Jersey and Delaware. It has a five-year revenue growth rate of 1.7%, P/E of 25.6 and quarterly dividend of 19 cents.
His third-largest, York Water Co., represents 0.01% of his portfolio with 50,000 shares, unchanged since the fourth quarter 2013. His share represents 0.39% of shares outstanding, and the company’s shares gained 22.2% year to date. York Water impounds, purifies and distributes water through 48 municipalities in Pennsylvania, north of Baltimore. In 2016, the company plans to close on four acquisitions that will add 2,050 new customers to its base. York Water has a five-year revenue growth rate of 3.5%, P/E of 30.6 and a quarterly dividend of 15.6 cents.
In his other water-related positions, Gabelli has a 2.5% stake in Gorman-Rupp Co. (GRC, Financial) with 662,259 shares. Gabelli commented on the company in his fourth quarter shareholder letter:
The Gorman-Rupp Co. (0.7%) (GRC – $26.73 – NYSEMKT) is a leading manufacturer of pumps and related equipment for use in water, wastewater, construction, industrial, fire protection, HVAC, and other liquid handling applications. In the municipal market, GRC manufactures a clean water and sewage handling pumping system that supplies fresh drinking water to nearby communities and removes sewage water for reuse. In the water and wastewater markets, GRC makes large pumps for flood control that can move large volumes of water continually and quickly. When Hurricane Katrina caused the flooding of New Orleans, the U.S. Army Corps of Engineers purchased eight pumps from Gorman-Rupp to reduce the water level. In the commercial market, the company makes an extensive line of centrifugal pumps, automatic sprinkler systems, fire hydrants, and pipes for the fire protection market. Gorman-Rupp products are extensively used in the replacement market. We believe the company has a bright future, driven by the aging infrastructure in the U.S. that requires replacement or upgrade and by the building of new infrastructure in developing countries.
He has at least one other, a 6.1% stake in Layne Christensen Co. (LAYN, Financial), with 1,219,100 shares. The company’s stock has gained 35% year to date. Layne is a global water management construction and drilling company with operations in North America, Africa, Australia and elsewhere. Chuck Royce (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio) also hold shares of the company. It has a five-year revenue decline rate of 3.3% and pays no dividend.
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