Many value investors own one or more undervalued utility stock, including water stocks. Typically, these stocks are low on growth, pay steady dividends and carry a price-to-earnings (P/E) ratio in the single digits. However, like many commodities, water is becoming more valuable. The performance of utility stocks has raised the valuation of the sector which now trades at a forward P/E ratio of 16.4x. Still, you can find some undervalued water stocks for the second half of the year.
Why water stocks? You turn on the sink and out comes clean water. It’s a simple proposition and one that gets taken for granted by most of the developed world. But water scarcity is becoming a real concern. Demand for fresh water is projected to exceed supply by 40% as soon as 2030.
That makes infrastructure that provides such a seamless delivery a space where investors can hang out. Here are three undervalued water stocks for investors to consider.
Pentair (PNR)
Pentair (NYSE:PNR) delivers water solutions through three business units. It’s Flow business deals with how water moves into your home, including water treatment. The Water Solutions business focuses on the way water and ice taste inside your home or business. The Pool business as the name suggests delivers solutions for residential and commercial pools and spas.
With a forward P/E of 17.9x, Pentair is the most expensive of these undervalued water stocks. But earnings are expected to grow by 13% year-over-year (YOY). To make that forecast come through, the company is expecting to see a recovery in its Pool business, which has been weighed down by inventory imbalances.
PNR stock is up 4.1% this year. However, it’s down about 13% from its all-time high set in March. However, analysts are bidding the stock higher with 13 analysts giving the stock a “Strong Buy” or “Buy” rating. And it has a consensus price target of $90.56 which would give investors 19% stock price appreciation to go along with a dividend that yields 1.22%.
Consolidated Water (CWCO)
Consolidated Water (NASDAQ:CWCO) designs, constructs, manages and operates water production and water treatment plants. The company has an exclusive license with the Cayman Islands government to operate as a water utility. It operates four business units throughout the Caymans, Bahamas and the U.S.
CWCO stock is down 26% in 2024 and it’s not immediately clear why. The company posted a decent earnings report, beating analysts’ revenue and earnings forecasts. Both numbers were also higher YOY.
Investors may have been skittish about a dispute that Consolidated had with Mexico regarding a desalination project. They may also have some concern that revenue and earnings growth will normalize this year after taking a big jump between 2022 and 2023.
However, over the last five years, Consolidated Water has delivered a total return of 98.25%. That’s why because of the consistent demand for water, investors can look at 2024 as an outlier and consider buying this dip.
California Water Service Group (CWT)
California Water Service Group (NYSE:CWT) rounds out this series of undervalued water stocks. The company operates as a water utility and provides other water-related services in five states: California, Washington, New Mexico, Hawaii and Texas.
The five-year total return for CWT stock is not overly impressive, reflecting the idea that utilities are highly regulated. But a recent favorable ruling in the California General Rate Case will provide the company with funding to make infrastructure improvements. It also provides the possibility of rate increases in the next two years.
That may be the reason that analysts are still forecasting a 9% increase in the company’s stock price despite projections of a decline in earnings of more than 20%. With CWT trading around $50, this may be a time to start accumulating shares and benefit from a dividend king that has increased its dividend for 58 consecutive years and has a 2.12% yield.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
