No, this wasn’t a conversation about petroleum, ethanol, biodiesel or even Coca-Cola. Instead, he talked about water. And not the kind of polluted (mostly salty) water that covers most of the planet, but clean drinking water — a commodity that is becoming increasingly scarce across the globe.

Water is a subject that’s been on Eric’s mind recently. In fact, he was busily making edits to a lengthy document he’s preparing on the subject as we spoke. He and other astute Agora Financial editors like Chris Mayer view water resources and infrastructure as a growing problem in this country and abroad. And it’s no wonder why…

Pollution and an aging water infrastructure could make clean drinking water into a coveted — and scarce — resource, even in a developed nation like the U.S.

The United States Geological Survey recently released a report on volatile organic compounds (VOCs) in the country’s ground water and drinking water. And while VOCs were not detected in many of the nearly 3,500 wells sampled in the study, “VOCs were detected in most aquifers throughout the Nation, and were not limited to a few specific aquifers or regions.”

VOCs were detected in 14% of domestic well samples and in 26% of public well samples. While most were at concentrations that would be unlikely to affect our health, the mere presence of poisons in drinking water is enough to cause concern. For instance, the most widespread VOCs detected in the study were chloroform and the gasoline additive MTBE.

And drinking water’s path to your home could also present all kinds of problems. Eric recently wrote to his Rude Awakening audience that much of America’s water infrastructure is in disrepair, and it will take a massive investment to bring it up to par. Consider this: Eric wrote recently that the United States’ water infrastructure will be in need of a $1 trillion overhaul over the next 20 years, according to the American Society of Civil Engineers.

“According to the EPA, nearly 25% of the nation’s water pipes are ‘poor, very poor or elapsed,’” Eric writes. “Even worse, the EPA expects that percentage to increase to 45% by 2020…unless something is done about it.”

International Dilemmas

Here is the international water situation put into perspective, with some helpful water facts from Frontline:

– Out of 191 nations in the world, 10 nations share 65% of the world’s annual water resources.

– 1.2 billion people — or almost one out of five people in the world — are without access to safe drinking water and half of the world’s population lacks adequate water purification systems.

– In 1998, 31 countries faced chronic freshwater shortages. By the year 2025, however, 48 countries are expected to face shortages, affecting nearly three billion people — 35% of the world’s projected population. Countries in danger of running short of water in the next 25 years include Ethiopia, India, Kenya, Nigeria, and Peru.

And I think it’s safe to add China to that list, as well. Chris Mayer, who recently traveled to China, reported in the Rude Awakening that China’s breakneck growth has pushed the country’s water system to “the verge of collapse.”

Consider some of Chris’ hard-to-ignore facts: A majority of China’s 600 largest cities don’t have enough water…and half of them have polluted groundwater…less than 15% of China’s population has safe drinking water.

And most people in China don’t live near water resources. It’s another consequence of becoming a more modern society. Americans flock to desert cities like Las Vegas without realizing the effort it takes to get water to its residents. Employment, quality schools and good neighbors are usually reasons families make a move…not proximity to springs or aquifers.

And as Chris reports, almost half of China’s population lives in the country’s northeastern provinces, where only 14% of the water resources are located.

While the situation looks bleak, there will be companies that will benefit from the impending water crunch. And we’ll be looking at ways to profit from the water crisis over the next several months. I’ll be sure too dig up some small-cap water plays for you, and I’ll also keep you posted on the findings of our friends over at the Rude Awakening [You can keep tabs on Eric and company yourself here.] Word on the street is that a special water report will soon be available to their readers. Watch this space for further details…

Announcing New Coverage

Earlier this month, Small-Cap Strategy Report editor James Boric asked his readers to write to him with any companies they would like him to cover in his newsletter.

He expected to hear from a few people, but hundreds of his readers wrote in with their stock ideas.  So James came to me and asked if I would sift through these messages and provide coverage of the most popular picks.

I have agreed and will begin writing about one of his readers’ picks every month, starting two weeks from today. I’ll try to concentrate on the businesses that appear to be the most popular, not necessarily the one’s I think are most important to write about.

One more thing: James also asked me not to hold back when I talk about these companies. So if it’s a terrible pick then I’ll let you know — just a little heads-up if you’re not a fan of bad news.

So to all of you Small-Cap Strategy Report and Sleuth readers — please think of me this summer when you’re enjoying a relaxing beach vacation. I’ll be here in Baltimore, helping you out with your research.

And if you want to learn more about Small-Cap Strategy Report or James’ other service, Small-Cap Insider, then be sure to visit the Sleuth.

Best,

Gunner
June 26, 2006

Not a Drop to Drink was originally featured in the Penny Sleuth.