The 3 Hottest Water Stocks to Watch in 2024

Stock Market

Fidelity published an article on Nov. 28, 2023, wondering if it was time for investors to take the plunge and buy water stock.

“It’s possible that our freshwater supply may diminish, threatened by climate change, contamination, and drought. In fact, water scarcity is expected to worsen as the global population continues to boom. By 2030, demand for global freshwater is projected to exceed supply by 40%,” Fidelity stated.

Anyone who lives in or near Las Vegas knows all too well the dire situation regarding the supply of fresh water in the region. Since 2000, the elevation of Lake Mead, one of the primary water supplies in Southern Nevada, has fallen by more than 150 feet

As a result of the water shortages in this country and around the world, the hottest water stocks are likely to attract more attention in 2024 than at any other time in the past. 

Who are the water stocks to bet on? Here are three excellent ideas. 

Water Stock: Invesco Water Resources ETF (PHO)

Source: Shutterstock

Invesco Water Resources ETF (NASDAQ:PHO) is one of the leading water-related ETFs listed on a U.S. stock exchange with $1.95 billion in net assets. The ETF tracks the performance of the NASDAQ OMX US Water Index, a collection of companies “that create products designed to conserve and purify water for homes, businesses and industries,” states the ETF’s homepage. 

Morningstar gives the ETF a five-star rating in the natural resources category for the past three, five, and ten-year periods. In 2023, PHO generated a total return of 18.9%. 

The average stock in the 40-stock portfolio has an average market capitalization of just under $33 billion with a forward price-to-sales ratio of 20.9x and a 22.6% return on equity. Its top holdings account for 60% of its net assets. 

The top three industries by weight are machinery (20.98%), trading companies and distributors (12.67%), and life sciences tools and services (12.07%). 

The ETF charges 0.60%, a relatively inexpensive way to benefit from the world’s solutions to water shortages. It’s definitely a great water stock to bet on.

Ferguson (FERG)

Source: T. Schneider / Shutterstock.com

Ferguson (NYSE:FERG), although based in the UK, is a value-added industrial distributor focused solely on the North American market, providing products for infrastructure, plumbing and appliances, HVAC, fire, fabrication, and other industries. 

The company has approximately 1,549 locations and 10 national distribution centers in the U.S., served by about 32,000 employees nationwide. It also has 213 branches in Canada, served by one national distribution center. It operates under the Wolseley brand in Canada

Ferguson started in the U.S. in 1953 and was acquired by U.K.-based Wolseley-Hughes in 1982. Wolseley went public on the London Stock Exchange in 1986. It was renamed Ferguson plc in 2017. In 2021, it sold off the last of its European businesses to focus on North America.

This year, it expects revenues to remain flat over 2023, with a 9.5% operating margin at the midpoint of its guidance, down 30 basis points from 2023. 

In fiscal 2023 (July year-end), it faced tough comparatives to the previous year. For example, it had full-year sales growth of 4.1% in 2023, down considerably from a 25.3% gain in 2022. However, on an adjusted basis, it had an operating margin in 2023 of 9.8%. 

It should start growing again once it gets past Q2 2024 (January quarter-end) due to lower sales comparisons. 

Up 46% over the past year, it will be tough to deliver a repeat performance. That said, its long-term growth remains bright.   

A.O. Smith (AOS)

Source: HQuality/ShutterStock.com

A.O. Smith (NYSE:AOS) is not in PHO’s top 10, landing just outside in 11th spot, with a 3.99% weight. The Milwaukee-based company manufactures water heaters (tank and tankless), water filtration, and water softening products. It is considered one of the world’s leading water heating and treatment solutions providers.

I’ve been a fan of the company and stock for many years. I first recommended its stock to InvestorPlace readers in July 2012, suggesting that AOS was a stock to own forever. I still feel that way. 

So, I’m glad it’s gained over 38% in the past year, delivering an excellent return for shareholders in 2023. It trades a few dollars shy of its all-time high set at the end of 2021. I think shareholders can expect it to hit a new all-time high in 2024. 

The company’s most recent earnings report was at the end of October. Its Q3 2023 results included a 7% increase in sales to $938 million, with a 27% increase in earnings per share to $0.90. 

Based on its adjusted EPS of $3.75 in 2023, it is a reasonable 21.8x earnings. It’s a long-term buy.

On the date of publication, Will Ashworth 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.

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