February was a terrific month for indices but the very first day of trading in March registered significant losses. Concerns over the situation in Crimea pulled down benchmarks to their worst selloffs in nearly a month. Meanwhile, economic reports were on the positive side, but this failed to provide enough momentum.
The Promise of Utilities
This underlines the volatility inherent in markets, underscored by the fact that the S&P 500 closed in the red during January for the first time since 2010. On the other hand, bond yields have been on the lower side, primarily due to the Fed’s decision to continue tapering its monetary stimulus.
Such conditions have made utilities stocks a good bet. Traditionally, this sector is the reserve of the risk-averse investor, who prefers steady dividends and regular profits. But the evidence for this year shows an increasing preference for utilities. Year to date, the S&P 500 Utilities Index is up 6.4%.
The Importance of Water Services
The increasing importance of water services is best illustrated by the situation in California. Only in mid-February did parched Northern California receive a sizeable amount of rainfall. Governor Jerry Brown had declared a state of emergency in January, urging citizens to limit water usage.
This may be the worst possible scenario for a state which faces dry conditions under normal circumstances. But it is evocative of other water-related challenges the nation faces today. The health of the country’s water-related infrastructure is a crucial issue for the Environmental Protection Agency (EPA).
A National Priority
The EPA will receive significant amounts as per Congress’ omnibus spending bill to address water-related issues. $1.4 billion has been allocated for loans to states to be spent on water quality protection projects. Grants worth $907 million will be disbursed to modernize drinking water systems.
An additional $5.5 billion will be given to the Army Corps of Engineers. The Corps concentrates on restoring ecosystem balance, flood risk reduction, hydroelectric power and other issues. A total amount of $7.8 billion is being provided by Congress to improve water-related infrastructure.
Below we present three water-related stocks which stand to gain from this situation, each of which also has a good Zacks Rank.
SJW Corp.
SJW Corp. (SJW) has four subsidiary companies; San Jose Water Company, Texas Water Alliance Limited, SJW Land Company and SJWTX, Inc. San Jose Water Company provides water services to nearly a million people in the metropolitan San Jose, California area. The company’s fourth-quarter 2013 operating earnings per share of 23 cents were in line with the Zacks Consensus Estimate.
SJW Corp. holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 6.00%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 19.60 and dividend yield is 2.53%.
Connecticut Water Service Inc.
Connecticut Water Service Inc. (CTWS) operates across three segments: water activities, services and rentals and real estate transactions. Connecticut Water supplied water to over 90 thousand customers across 55 towns in Connecticut as of December, 2011. In its third quarter, the company had reported earnings per share of 86 cents, surpassing the Zacks Consensus Estimate of 69 cents by 24.6%.
Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 3.4%. It has a P/E (F1) of 18.87 and a dividend yield of 3.01%.
AECOM Technology Corp.
Our third choice is AECOM Technology Corp (ACM). The company offers managerial and technical support services to commercial and government clients worldwide. It is a provider of consulting, planning, designing and construction management services for various kinds of projects, including water and wastewater facilities.
Besides a Zacks Rank #2 (Buy), AECOM Technology Corp. has expected earnings growth of 5.70%. It has a P/E (F1) of 12.36. AECOM reported earnings of 37 cents per share for first-quarter fiscal 2014 (ended Dec 31, 2013), beating the Zacks Consensus Estimate of 36 cents by a penny.
The actions taken by Congress mean these companies stand to gain due to the crucial role they play in water-related services. This is why they would make good additions to your portfolio.
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