Thirsty for Stock Ideas? Coming Global Water Shortage Suggests These Five

Water, water everywhere. Well, maybe not so much.

One of the biggest issues expected to confront the world in the decades to come is persistent drought. That could produce shortages of food and water, but it could also create an abundance of profitable investment opportunities, according to a report published recently by Bank of America Merrill Lynch (BAC).

The worst drought in the United States since 1956 – accompanied by a July that was the hottest month on record in the Continental United States since at least 1895 – wrought havoc in the Midwest last summer, sending prices of grains and oilseeds like soybeans sharply higher. The authors of the Merrill report, “Global Drought – Opportunities and Risks,” contend that we are approaching a future in which months like July will occur with increasing frequency as a result of long-term climate change, taxing supplies of food, water and energy.

US Soybean Price (per mt) Chart

US Soybean Price (per mt) data by YCharts

Exacerbating the potential for shortages, they say, are changing demographic factors, most notably the growth in population and standard of living in the developing world. It takes far more water to produce a pound of meat than a pound of grain, the authors, led by Sarbjit Nahal, an equity strategist for Merrill in London, point out, and people tend to eat more meat as they become better off.

“The U.S. drought reiterates the growing long-term challenges on food, water and energy security,” they write. “By 2030 global food demand is set to increase by 50%, water demand by 40% and energy demand by 50%.”

Just as the financial crisis and bear market created opportunities, the authors say, so, too, will increasingly acute global weather conditions. The report highlights several investment themes that should benefit from the fight against drought and the enhancement of food and water supplies and energy security. They include water production and delivery; fertilizers; crop science and energy efficiency.

The authors then identify 39 domestic and foreign stocks, each with a market capitalization of at least $5 billion, which have medium or high exposure to one or more of the themes.

Many of the names on the list are plays on energy or transportation efficiency and so have only a tangential relationship to drought and its effects. Of the remaining companies, five that are based in the United States have activities related to food and water production, including three with sufficiently concentrated businesses for Merrill to judge them to have high exposure: Monsanto (MON), a leader in genetically modified foods, and the fertilizer producers CF Industries (CF) and Mosaic Group (MOS).

If you’re looking for something in a medium, the Merrill list includes Dupont (DD), which sells hybrid corn and soybean seeds in addition to the chemicals for which it’s more famous, and Ecolab (ECL), an especially ecumenical company that is involved in water treatment, along with food service, healthcare and energy.

CF has been the standout performer of the five in 2012, as seen in a stock chart.

MON Chart

MON data by YCharts

As for valuation, CF appears dirt cheap, based on PE ratio, even after its strong run. Dupont and Mosaic are trading at close to market multiples. Monsanto is somewhat pricey, and Ecolab trades at an even richer PE ratio.

MON PE Ratio TTM Chart

MON PE Ratio TTM data by YCharts

Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at editor@ycharts.com.

Read more articles about: Company Analysis  

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