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We recently compiled a list of the 8 Best Water Stocks To Invest In. In this article, we will look at where Pentair plc (NYSE:PNR) ranks among the best water stocks to invest in.
The water industry is grappling with a unique set of challenges and opportunities as the demand for clean and safe drinking water continues to rise globally. According to the American Water Works Association’s (AWWA) State of the Water Industry Report, there is increasing scrutiny on water quality and access standards, while the sector simultaneously faces pressures from aging infrastructure, water scarcity, emerging contaminants, and evolving cybersecurity threats. The convergence of these issues has made it essential for industry professionals to adopt innovative solutions, foster collaboration, and make strategic investments in people and technology.
This dynamic landscape presents both risks and opportunities for investors looking to enter the water sector. Companies operating in this space are not only focused on ensuring reliable access to drinking water but also on pioneering technologies that address complex issues such as water purification, distribution, and resource management. The report notes that watershed and source water protection, once considered secondary concerns, have now emerged as the top priority for water utilities. This shift reflects a growing recognition of the importance of safeguarding water sources to maintain a sustainable and affordable supply.
In 2024, watershed protection surpassed the perennial challenge of aging infrastructure, which has long been a concern for water utilities. Contributing to this shift are various factors, including the prolonged impacts of climate change, drought conditions, and the threat of contaminants such as per- and polyfluoroalkyl substances (PFAS). PFAS have become a major water quality concern due to their presence in numerous industrial products and their potential to harm public health. Addressing this issue alone is expected to cost the industry nearly $40 billion in capital improvement investments. This underlines the financial and operational hurdles that water companies must overcome, making it a pivotal year for those at the forefront of water resource management.
Despite these challenges, the industry is taking proactive steps to enhance water quality and infrastructure resilience. The Bipartisan Infrastructure Law (BIL) has provided some relief, offering funding to support capital projects, which in turn helps address concerns about aging systems. Utilities are also increasingly implementing water protection plans, with over 61% of respondents in the AWWA survey indicating that they have already integrated or are in the process of integrating source water protection initiatives. This proactive stance demonstrates the sector’s commitment to long-term sustainability.
One of the more critical developments in the water industry is the integration of new technologies. Investments in digital solutions, advanced treatment methods, and green alternatives are expected to more than double over the next one to three years. The adoption of such technologies is seen as “very important” by utility operators and “extremely important” by service providers, according to the AWWA report. The focus is on maximizing the lifespan and performance of existing systems while simultaneously exploring eco-friendly innovations that can bolster water system resilience. This creates a fertile ground for companies specializing in technological advancements to thrive, as they cater to the industry’s growing demand for efficient and sustainable solutions.
Another pressing issue for water industry is cybersecurity. As utilities increasingly rely on digital infrastructure, they become more vulnerable to cyber threats, which pose significant risks to water operations and the privacy of customer data. The survey found that 67% of participants view cybersecurity as a “very” to “critically” important issue, and 82% believe that cyber threats would have a “slight” to “significantly negative” impact on the water sector. Despite these concerns, smaller utilities often lack the resources to enhance their cybersecurity posture, creating a security gap that could lead to severe disruptions. Addressing these vulnerabilities is crucial as utilities look to secure their operations against growing cyber threats.
Looking ahead, water utilities must continue to adapt and innovate to meet the evolving challenges of the industry. Climate change and its associated extreme weather events, for instance, pose a growing threat to water resources and infrastructure. Droughts, water shortages, and unpredictable weather patterns have made it imperative for utilities to adopt robust water management strategies. Consequently, companies that provide solutions for water conservation, infrastructure renewal, and climate resilience are well-positioned to capitalize on these emerging trends.
The water industry’s focus on source water protection, technological innovation, and infrastructure resilience, coupled with its commitment to addressing cybersecurity and climate change, makes it a compelling sector for investors. Companies that are leading in these areas have the potential to drive significant returns while also contributing to the sustainability and safety of global water resources. In the following sections, we explore some of the best water stocks to invest in, analyzing their strategies, performance, and potential for growth in this complex and ever-evolving industry.
Our Methodology
For this article, we sifted through ETFs and online rankings to identify 15 possible companies that operate in the water industry. We then chose the 8 stocks that were the most widely held by hedge funds, as of Q2 2024. The list is arranged in ascending order of the number of hedge fund holders in each firm.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Pentair plc (NYSE:PNR)
Number of Hedge Fund Holders: 40
Pentair plc (NYSE:PNR) is considered a water stock due to its extensive focus on water solutions, such as flow and filtration systems, which are essential for water purification and management across residential, commercial, and industrial applications. As of Q2 2024, Pentair is held by 40 hedge funds, an increase from 39 in the previous quarter, demonstrating rising investor interest in the company.
Pentair plc (NYSE:PNR) reported strong Q2 2024 financial results, beating expectations and showcasing the strength of its water-centric business. The company posted an earnings per share (EPS) of $1.22, surpassing the anticipated $1.15. Revenue reached $1.1 billion, reflecting a 2% year-over-year increase. The growth was supported by gains in the Pool and Commercial segments, partially offset by a decline in the Residential segment due to macroeconomic pressures.
One of Pentair plc (NYSE:PNR) notable strengths is its consistent margin expansion. In Q2, adjusted operating income increased by 16% to $271 million, while return on sales (ROS) expanded by 310 basis points to 24.7%. This achievement was driven by effective cost management and strategic pricing initiatives, underscoring Pentair’s ability to optimize profitability across its diverse portfolio. Additionally, adjusted EPS grew 18% year-over-year, further highlighting the company’s robust financial health.
Pentair plc (NYSE:PNR) Pool segment experienced impressive growth, with sales rising 17% year-over-year to $392 million. This marks the first time in eight quarters that the Pool segment returned to growth, driven by strong demand for aftermarket products and sustained consumer interest in pools. Segment income for Pool rose 27%, and ROS expanded 270 basis points to 34.1%. This performance indicates Pentair plc (NYSE:PNR) ability to capitalize on the trend of outdoor leisure activities, even amid economic headwinds.
Looking ahead, Pentair plc (NYSE:PNR) has raised its full-year 2024 EPS guidance to $4.25, reflecting confidence in its growth trajectory and strategic initiatives. With favorable secular trends like increased awareness of water quality, infrastructure upgrades, and sustainability concerns, Pentair is well-positioned for long-term growth. The company’s disciplined capital allocation strategy, which includes stock buybacks and consistent dividend increases, further enhances shareholder value. Overall, Pentair plc (NYSE:PNR) focus on innovation and operational efficiency make it a compelling choice for investors seeking exposure to the water industry.
Overall PNR ranks 2nd on our list of the best water stocks to invest in. While we acknowledge the potential of PNR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PNR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.