Investing July 26, 2009, 10:08PM EST

Investing: The Best Water Plays

An estimated $96 billion in stimulus spending directed at water infrastructure worldwide will be a boon for water-related stocks in the next two years

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Put on your snorkel and get ready for an expected flood of investing in water-related stocks as the push for government spending on water infrastructure and services to meet higher environmental standards accelerates. That bodes well for a number of water-related stocks and mutual funds.

On July 15, Representative Earl Blumenauer (D-Ore.) introduced a bipartisan bill that would create a water trust fund for investing in America's broken drinking-water and sewage-treatment systems. The Water Protection & Reinvestment Act (H.R. 3202) would create a $10 billion annual fund to repair decaying pipes and sewer systems that threaten public health, the environment, and overall security.

And a bipartisan Senate bill (S. 1005) that would reauthorize the Clean Water State Revolving Fund and Drinking Water State Revolving Fund and provide $38.5 billion for Environmental Protection Agency water-infrastructure programs over the next five years reportedly has the support of both parties and is expected to be acted on by the Senate in the near future. These revolving funds haven't been reauthorized in 22 and 12 years, respectively. A House version called the Water Quality Investment Act of 2009 (H.R. 1262), which would reauthorize the Clean Water State Revolving Fund at $13.8 billion over five years, was passed in March.

Of course, there's quite a bit of fiscal stimulus already flowing toward companies that can help rebuild the country's faltering water infrastructure. William Brennan, co-manager of the $17 million Kinetics Water Infrastructure Advantaged Fund (KWIAX), estimates that $13.9 billion of the Obama Administration's stimulus package has been put toward overhauling water infrastructure and other water-related activities but says "that's just a Band-Aid on an open-heart-surgery patient." The U.S. is roughly $600 billion behind in revamping water pipes and sanitation systems, Brennan says, and he expects the government to push for rebuilding with greater voracity.

expecting a surge of investment

U.S.-based water funds are currently much smaller than their counterparts in Europe. U.S. investors have been slow to appreciate the importance of water as "the backbone of every activity," from manufacturing to energy to daily living. And so far, Americans haven't experienced water shortages to the same degree as people in other parts of the world, Brennan says. He expects a surge in water investment to begin over the next one to three years: "Water-stress areas in California, Texas, and Florida are real and are only getting worse."

Other states have water woes, too. In a dispute over water in the Apalachicola-Chattahoochee-Flint basin, which includes Lake Lanier, that dates back to the 1970s, Florida and Alabama are seeking a permanent injunction to prohibit withdrawals in Georgia in excess of 2000 levels, according to the metropolitan Atlanta Chamber of Commerce. A U.S. District Court ruling on July 17 declared almost all of the water Georgia has withdrawn from Lake Lanier illegal, since the lake was built to provide hydroelectric power. That means Atlanta may soon need to find alternate sources of water. The judge said the Army Corps of Engineers needed to get approval from Congress before the Atlanta metropolitan area could use Lake Lanier as its primary water source.

Among Brennan's top holdings are Veolia Environnement (VE) and URS (URS), which provides engineering, construction, and technical services to the power, infrastructure, federal, and industrial and commercial market.