Water Is a Tricky Investment. Here Are Wall Street’s Favorite Stocks.

If water is so important, why aren’t there more ways to invest in water trends? (Dreamstime)

Key Points

• Investing in water is challenging due to limited pure-play options and a smaller market capitalization compared with other sectors like oil.
• Wall Street favors water technology companies with advanced products, such as Xylem, Pentair, and Itron, which have high Buy-rating ratios.
• Verato and Badger Meter have Buy-rating ratios close to 50%.

Investing in water isn’t easy. There are only a handful of stocks investors can follow, and a smaller group that Wall Street likes best.

Water is a constant source of worry amid dwindling aquifers, leaky infrastructure, increased pollution, and rising demand due to population growth, industrial expansion, and agricultural development.

Despite all that, water is surprisingly tricky to invest in. There are some water exchange-traded funds, such as the Invesco Water Resources ETF or the First Trust Water ETF. Both hold more than 30 stocks, but mixed in with the likes of pure-play water technology companies Xylem and Veralto are water utilities such as American Water Works, engineering and construction firms such as Aecom, and even Fortune Brands Innovations.

Utilities typically attract different kinds of investors than those interested in water technology. E&C firms do a lot more than build water infrastructure. And while Fortune Brands is a fine company, its connection to water is via its Moen faucets brand. (It also makes Master locks and residential doors.)

There is also the problem of market cap. The total market capitalization of companies held by the Invesco water ETF is about $480 billion, very close to what Exxon Mobil is worth. Exxon is one of the largest holdings in the Energy Select Sector SPDR ETF. The market value of holdings in that fund tops $1.6 trillion. It’s easier to find investments in oil than in water.

One reason is the relative price. Benchmark oil prices are about $60 per barrel or $1.40 per gallon. Gasoline, which is a refined product, is currently north of $3 per gallon for American drivers. Water utility customers pay closer to a penny per gallon. Oil is hundreds of times more valuable than water. Go figure.

Filtering out firms that aren’t really water companies leaves investors with a few to look at, including: Xylem, Veralto, Pentair , Itron, Badger Meter, Franklin Electric, Watts Water Technologies, and Mueller Water Products. Outside the U.S., Switzerland’s Sulzer and Germany’s KSB make pumps and other hardware.

There are some others to watch. Ferguson Enterprises distributes plumbing supplies. Advanced Drainage Systems makes pipes. Larger diversified companies such as Roper Technologies and Ecolab also have water divisions.

Leaving the latter group aside, Wall Street prefers companies with more technologically advanced products, such as smart meters, filters, or purifiers. Xylem (a recent pick for the Barron’s Investor Circle), Pentair, and Itron are the favorites. Two-thirds of analysts covering Xylem and Pentair rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. More than 90% rate Itron shares Buy. Verato and Badger Meter, which have more technically advanced products, have Buy-rating ratios close to 50%.

Analysts don’t seem to prefer shares of pump maker Franklin Electric and fire hydrant manufacturer Mueller Water. The Buy-rating ratios for those stocks are 40% and 33%, respectively.

Buy-rating ratios are only one factor to consider, but they can be a starting point for investors looking to dive deeper into the sector.

Write to Al Root at allen.root@dowjones.com