Listen up. This could easily prove to be the most important Sleuth alert I write to you for the next year — possibly longer. Two massive profit opportunities are developing right now. Both trends are early in the profit cycle. So you still have time to get in on the action. But I wouldn’t wait too long.

Here’s the deal…

At last week’s closed-door Agora Financial editorial meeting, Chris Mayer (the editor of the successful Capital & Crisis) and Eric Fry (editor of Rude Awakening) couldn’t stop talking about two of the Earth’s most precious commodities. And no, they are NOT gold and oil.

These two natural resources are far more valuable than both gold and oil combined. Every industry in the world depends on them in some way — directly or indirectly. And every person needs them to survive.

The first valuable commodity is fresh water.

There are more than 6.5 billion people living on Earth today. That’s approximately four times as many as at the start of the 20th century. And the United Nations predicts that number will swell to over 10 billion by 2100. Whether you are born in Africa, Asia or the good ole US of A, one thing is certain: Everyone needs water to survive. Problem is, 97% of Earth’s water isn’t suitable for drinking.

As Chris pointed out in his January issue of Capital & Crisis, “While water largely covers this hardscrabble little planet of ours, less than 3% of it is fresh water. And the presence of pollution and disease has made much of that water undrinkable. Unlike with oil, no amount of technological wizardry can replace water.”

It doesn’t take a genius to realize that as demand for water increases (thanks to a rise in the population) and supply either remains flat or decreases (no one is “making” more water), the price will rise. And it’s that simple but spot-on logic that prompted Dan Denning of Strategic Investment to dub water one of the top investment ideas for 2006.

Water and Sugar Companies: Small-Cap Water Plays Ready to Burst

To prove just how valuable water already is, Dan wrote, “In mid-December, the premiers of Quebec and Ontario, along with the governors of eight U.S. states, signed a pact that will ban all large-scale water diversions from the Great Lakes basin. That will prevent fully 20% of the total fresh surface water of the Earth being exported by pipeline to thirsty states like California, Arizona or Nevada. The eight states that border the Great Lakes — Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania and Wisconsin — have seen the future. future. And the future is that fresh surface water is going to be more and more valuable as it gets more and more scarce.”

Translation: Entire states are already starting to protect their fresh water supplies. They know what a valuable commodity they are sitting on.

So the question is, how can you invest in this trend and make a nice little (possibly even quite large) profit?

There are several small-cap water plays on the market right now — from water utility companies to equipment companies and others. Here’s a list of some of the top small-cap companies on the market today:

1) American States Water Company (AWR:NYSE), market cap of $526 million. AWR is a public utility company. It purchases, produces, distributes and sells water in California. It serves approximately 250,000 water customers. Current price: $31.36.

2) Southwest Water Company (SWWC:NASDAQ), market cap of $333.4 million. SWWC’s services include water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. Current price: $15.48.

3) Layne Christensen (LAYN:NASDAQ), market cap of $443 million. LAYN is a drilling services company. It serves four principal markets: water resources, mineral exploration, geoconstruction and energy. Current price: $29.14.

4) Franklin Electric Co. (FELE:NASDAQ), market cap of $1 billion. FELE designs, manufactures and distributes groundwater and fuel pumping systems, electronic controls and related parts and equipment. It manufactures submersible water and fueling systems motors used to pump fresh water. Current price: $45.35

5) Watts Water Technologies, Inc. (WTS:NYSE), market cap of $1.0 billion. As MSN Money reports, WTS “is a global manufacturer of safety and flow control products for residential and commercial plumbing, heating and water quality markets. The company’s product lines include backflow preventers for preventing contamination of potable water caused by reverse flow within water supply lines and fire protection systems…” Current price: $33.

6) California Water Service Group (CWT:NYSE), market cap of $777 million. The company distributes water and provides water-related utility services in California, New Mexico, Washington and Hawaii. Current price: $42.42.

7) Calgon Carbon Corp. (CCC:NYSE), market cap of $271 million. CCC provides services, products and solutions for purifying water and air. Current price: $7.40.

Consolidated Water Company (CWCO:NASDAQ), market cap of $266.2 million. CWCO uses reverse osmosis technology to produce fresh water from seawater. It supplies water to customers in the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas. Current price: $22.60.

If and when demand for water does increase (which it must), the companies I listed above should benefit. In fact, I firmly expect to write more about these companies in the months to follow. Stay tuned…

Water and Sugar Companies: A Small But Sweet Amount of Sugar

Of course, water isn’t the only commodity that is hot right now. There is another raw material making a few investors a lot of money. And like water, supplies are low and demand is high.

I’m talking about sugar.

Thanks to a smaller-than-expected harvest in Brazil, a record hurricane season here in the States, tightening supplies in Asia and a drought in Thailand, sugar prices are at 24-year highs.

This week’s Barron’s reports, “Importing nations may have little choice but to pay higher prices for sugar in the first half of 2006, after whittling down inventories in recent years…World 2005-06 sugar consumption should surpass output by 1.5-2 million tons after Brazil’s disappointing center-south harvest, the International Sugar Organization said in early January.”

This recent sugar high has been sweet for investors. And no one was on this trend earlier than my buddy Chris Mayer. Last year, Chris recommended his Capital & Crisis readers add shares of small-cap Imperial Sugar Company (IPSU:NASDAQ) to their portfolios. At the time, Imperial (which has been in business for over 160 years) was trading for less than its tangible assets. It had $4 per share in cash. And it traded for $11.44.

As of yesterday’s close, Imperial was trading for $25.39 — up 121.9%. And with sugar prices still on the rise, there’s no saying how much higher this stock will go.

There aren’t any more obvious small-cap sugar companies on my radar screen right now. But over the next few weeks, I’ll be looking hard to find a way to get in on this trend. As always, I’ll let you know what I find.

Until then, one thing is for sure, both water and sugar are hot commodities right now. And as small-cap investors, you would be wise to pay serious attention to them.

Good investing,

James
February 2, 2006

P.S. While guys like Chris, Dan and I focus on stocks to ride these major trends, my colleague Kevin Kerr recommends options and futures on the commodities themselves. Of course, they are riskier. But the upside potential is far superior — especially in the short term. For instance, on Dec. 22, 2005, Kevin recommended his readers buy October 2006 18-cent sugar calls. Only one month later, he said sell. The gain was a spectacular 204%. And it was no fluke.

Water and Sugar Companies: Two Massive Opportunities You Can’t Afford to Miss was originally featured in the Penny Sleuth.