Capital Markets

The water industry is becoming increasingly followed by the investment community.  There are four major Exchange Traded Funds listed today that enable investors to invest in the water industry in the United States and overseas.  A few water resource development firms are traded publicly.  One seawater desalination firm is traded in the United States. A handful of regulated water utilities are publicly held.  Capital markets may not be clairvoyant, but they can be informative about the consequences of trends and events in the industry.

Capital Markets provides information and analysis on developments concerning water exchange traded funds, water development firms and water utilities.  We create weekly performance charts and indexes for industry segments, as well as provide occasional commentary.

JOW tracks firms in three areas of the water industry:

  • Resource Development Firms: Cadiz Company (CDZI) and PICO Holdings (PICO)
  • Desalination Firm: Consolidated Water Company (CWCO)
  • Water Utilities: American States Water (AWR), American Water Works Company (AWK), California Water Service Group (CWT),
    and San Jose Water Company (SJW)
  • Exchanged Traded Funds (ETF): PowerShares Water Resources (PHO), First Trust ISE Water Idx (FIW), Guggenheim S&P Global Water Index (CGW),
    and PowerShares Global Water (PIO).

 

Occasional Capital Markets Commentary: Stalled and Struggling Performance May 28, 2014

Archive of Occasional Capital Markets Commentary

 

 

 Resource Development Firms

CDZI stock has been underperforming relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 6.1% from January 2006 through December 2012.  The Company announced a comprehensive refinancing package in March 2013 to accommodate project financing for the Cadiz Valley Water Conservation, Storage and Recovery Project.  The project faces litigation challenges, although the Company has been successful in securing dismissals or settlements in mid to late 2013.  The company also secured further working capital from an agreement with a senior lender in October 2013.  The turnaround in the company’s stock in the latter half of 2013 has closed the gap of stock performance relative to expected prices (projected by the Capital Asset Pricing Model adjusted by historical under performance).  The improvement in stock price peaked in mid-January.    

PICO stock had been underperforming relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 4.9% from January 2006 through December 2012.  The company’s stock has performed strongly in 2013, increasing by about 19% in 2013 in comparison to a small decline in expected prices forecasted by the Capital Asset Pricing Model (adjusted by historical underperformance).  Favorable developments for the company include a planned IPO for the company’s residential land development and residential homebuilding subsidiary, improvement in farming operations in production of canola oil and an option agreement to sell 7,240 AF of water rights in Lincoln County, Nevada to a power generation project at $12,000/AF.  

Desalination Firm

CWCO stock has been under-performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 4.1% from January 2006 through December 2012.  The company’s stock performed strongly through fall 2013 due to a run of three quarters where earnings significantly outpaced market expectations.  The stock peaked in mid-October 2013 when 3rd quarter earnings fell significantly and has been on a declining trend.

Water Utilities

AWR stock had been over-performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 8.2% from January 2006 through December 2012.    The company’s stock has performed strongly in 2013.  The company’s unregulated subsidiary, America States Utilities Services is rapidly expanding.  The company increased dividends by 14% in May, 2013.  The run-up in stock price over the summer in 2013 proved temporary.  The stock price fell below its expected price until early March 2014. 

AWK stock had been over performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 12.3% from January 2006 through December 2012. AWK’s stock price generally followed the expected price forecasted by the Capital Asset Pricing Model (adjusted for historical over performance) until late August 2013.  The lagging price performance coincides with announced decline in revenue from above average rainfall and cooler temperatures in its service areas.   

CWT stock has been over performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 2.4% from January 2006 through December 2012.  Cal Water’s stock price generally followed the expected price forecasted by the Capital Asset Pricing Model (adjusted for historical over performance) in 2013 until mid-October.  The increased pricing followed the announcement of a settlement of the company’s general rate case with the California Public Utilities Commission Office of Ratepayer Advocates.  The stock price is on a rising trend in 2014 where CWT’s expected has been flat.  

SJW  stock has been over performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 2.8% from January 2006 through December 2012.  San Jose’s stock price performance has generally lagged behind the price forecasted by the Capital Asset Pricing Model (adjusted by historical over performance) for most of 2013 until last December.  The company announced the appointment of a New Chief Administrative officer on January 30, 2014.     

Exchange Traded Funds

PHO stock had been over performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 2.9% from January 2006 through December 2012.  Powershares price has generally followed the expected price forecasted by the Capital Asset Pricing Model adjusted by the historical over performance through the first quarter of 2013.  Thereafter, its performance has lagged behind its expected price.  

FIW stock has been over-performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 6.4% from January 2006 through December 2012, the strongest performer of the four water ETF’s tracked by JOW.  Despite this historical performance, First Trust’s actual price started falling behind the expected price forecasted by the Capital Asset Pricing Model (adjusted by the historical over performance) by the end of the first quarter, 2013. 

GCW stock has been over-performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 1.6% from January 2006 through December 2012.  Guggenheim’s actual price started falling behind the expected price forecasted by the Capital Asset Pricing Model (adjusted by the historical over performance) by the end of the first quarter, 2013.   

PIO stock had been under-performing relative to the returns forecasted by the Capital Asset Pricing Model by an annual rate of 2.1% from January 2006 through December 2012.  The actual price has generally followed the expected price forecasted by the Capital Asset Pricing Model (adjusted by this historical under-performance) over 2013.  The actual stock price started running ahead of the expected price since last December.    

Industry Index Chart

The Indexes are based on equally-weighted portfolio of the underlying firms or funds in an industry segment starting on January 3, 2006.  Portfolios are rebalanced with inclusion of new entrants.  The value of the portfolios are normalized to 100 on the start date.

The Resource Development Firms, the Desalination Firm and the ETF’s crashed with the S&P 500 Index in fall 2008.  In contrast, stock prices of water utilities remained relatively stable.  With the turnaround in the S&P Index in 2009, the ETF Index jumped and caught up with the Water Utility Index by 2010.  The Resource Development Index and the Desalination Index generally followed the S&P Index until spring 2010 and fall 2009 respectively, when their fortunes separated—the former two starting a steady decline and the latter continuing to rise.  The ETF Index then fell off its rise with the Water Utility Index in the fall of 2011.  Since that time, the Water Utility Index continues marching ahead of the other segments, with ETF marching ahead of the S&P Index.  The Resource Index and the Desalination Index remain in steady decline.

The performance of an index reflects the performance of the index’s various components.  JOW uses the Capital Asset Pricing Model to measure a stock’s abnormal performance (measured by Alpha) and how the stock’s price moves with the market (measured by Beta).  The analysis is based on performance since January 3, 2006 through December 31, 2012.  Under performance by both resource development firms contributed to the decline in the Resource Development Index.  Desalination has also under-performed the market by about the same as the Resource Development Index. The growth in the Water Utilities Index is driven by American Water Works and American States Water, although the other two utilities generated positive, though smaller, abnormal returns.  Domestic ETF’s outperformed Global ETF’s.

Group./Entity

Alpha*

Beta**

Resource Development
   Cadiz Company

-6.1%

1.21

   PICO Holdings

-4.9%

1.09

Desalination
   Consolidated Water Company

-4.3%

1.01

Water Utilities
   American States Water

8.2%

0.79

   American Water Works

12.3%

0.50

   California Water Service Group

2.4%

0.68

   San Jose Water Company

2.8%

1.03

Exchange Traded Funds
   PowerShares Water Resources

2.9%

1.22

   PowerShares Global Water

-2.2%

1.09

   First Trust ISE Water Idx

6.4%

1.22

   Guggenheim S&P Global Water Index

1.6%

1.13

 * annual return in excess of return estimated by Capital Asset Pricing Model
** measure of how return varies with return on S&P 500 Index.

Definition of Capital Asset Pricing Model: a finance model relating the expected return of a risky asset (such stock) to a “risk free” return, such as U.S. Treasury Notes, plus a risk premium equal to the difference between the expected return on a diversified portfolio, such as the S&P 500 Index and the risk free return, multiplied by “Beta”.

Expected Stock Price: calculated by taking closing price for last week of 2012 adjusted weekly by the firms expected return from the Capital Asset Pricing Model

For a focus on more recent performance, see the “Weekly Performance Charts” for each firm and ETF.