Investing in Water Part II


Yesterday’s message, Water I, looked at the importance of water.

little horse creek

Little Horse Creek at Merrily Farms

That article viewed investing in land with water.

Another way I invest in water is with shares in water processing companies.

An interesting downwards trend has developed in water shares.  I always look twice when something about a clearly needed fundamental seems amiss. In this case… the world needs water!   Why would shares in water companies fall?

This series will revisit the three water companies we held in our Green Portfolio that rose 260%+ before the 2007 crash…  Hyflux, Kurita Water Industries and  Séché Environnement SA.

Then we’ll look at an investing tip that can make sure that water shares do not leave your investments and savings all wet.

This message looks at Hyflux Ltd chart from sg.finance.yahoo.com.   Hyflux trades in the USA as OTC code HYFXY.

water share chart

(click on photo to enlarge)

Hyflux shares up +590% in ten years.

We have been recommending (and investing ourselves) in Hyflux since 2004.  Each time the price drops I mention these shares again.

Right now one downwards concern (that could continue to press) on Hyflux shares are its large contracts in the Middle East and North Africa region. This business contributes 60 percent to the groups revenue.

We first recommended Hyflux in 2004.  Then we wrote about Hyflux again in 2008…  both times before the shares began to rise.  You can see in the chart above how those who purchased Hyflux in 2004 and 2008 have been in a position to make huge profits.

Here is what I wrote in 2008:

#1: Is Hyflux a well managed company?

I have liked the management team for years. The group is headed by Olivia Lum who has proven to be an astute leader. Hyflux Limited SGX: 600 began in 1989 as Hydrochem (S) Private Limited, a trading company selling water treatment systems in Singapore, Malaysia and Indonesia and later, China. Lum has been progressive. She added a team of scientists and engineers that created technology for Singapore’s water recycling plants that filter and treat waste water.

These technologies are based on semipermeable membranes and reverse osmosis that is capable of extracting potable water from residual, sewage and salt waters.

Hyflux was the first water treatment system company to be listed on Singapore’s equivalent of NADAQ in 2001 and the first to be upgraded to Singapore’s main exchange in 2003, again making history.

The group has been expanding geographically first to China, then lucrative Middle Eastern markets and is now entering India, Southeast Asia and Africa.

#2: Is the company in a growth industry?

There are few sectors with as much potential as water. China, the Middle East and India offer special opportunity.

#3: Are the shares available at a good value?

The shares are certainly a better value than a few months ago as the chart above shows.

I am writing about Hyflux again now because the global stock market sag has pushed Hyflux shares down once again and created extra value.
However as you can see from the company’s financials, sales, profits and dividends are at all time highs!

hyflux data

This is a good time to be looking at Hyflux shares.

An investment in Hyflux by the way, also represents an investment in Singapore dollars so all the numbers above have been enhanced by this added forex growth.

spre dollar

This chart from sg.finance.yahoo shows the benefits of a multi currency portfolio as the Singapore dollar has given a 20% extra profit versus the US dollar over the past five years.

More Vital point About Investments and Water.

The United Nations Water agency UNwater.org says:  A Drought in Your Portfolio?

The World Water Assessment Programme (WWAP) participated in the EIRIS conference on global water risk research. The conference explored the investment case for considering the risks and opportunities arising from water scarcity as part of a wider sustainable investment strategy, and heralded the launch of the EIRIS’ Global Water Risk report.

The report shows that out of the 2000 global companies analysed 54% are exposed to water risks but take little or no action to mitigate them, and approximately half show no evidence of any management response to water risks whatsoever.

The shares fell in 2011 due in part to the facts that the Middle East and North Africa (MENA) region, contributes 60 percent to the group revenue and delays to the company’s Libya contract as well as overall concerns about its Middle Eastern exposure.

On the positive side, not long after Hyflux was chosen as the preferred bidder to build and run Singapore’s largest-ever desalination plant, it was worth a total of S$890 million ($703 million).

Hyflux also added a concession to build and operate a plant to treat up 150,000 cubic meters of wastewater per day for Zunyi City in China’s Guizhou province.

An August 2012 Reuter’s article entitled “DBS downgrades Hyflux to hold” Said:   DBS Vickers downgraded water treatment firm Hyflux Ltd to hold from buy and cut its target price to S$1.45 from S$1.66, citing less-than-expected second quarter earnings due to weak margins for Singapore.

This was interesting since Hyflux had record profits in the first quarter of 2012 and second quarter net profits rose 21 percent from a year earlier to S$17.5 million.

What caught my attention in the article was the statement: The Arab Spring caused a drought in water contracts over the last 2-3 years, resulting in pent-up demand, DBS said, adding it believes Hyflux was bidding for two major projects in Saudi Arabia and Oman.

This creates a special three point opportunity… strong currency… undervalued sector and pent up demand for a well managed company.

This may not be quite the time to jump in (though I do hold Hyflux shares myself since I usually try to get in ahead of the rise).

Here are three important points about share investing to remember.

#1: Cheap stocks outperform expensive stocks.

#2: Stocks in companies with rising earnings outperform stocks in companies with falling earnings.

#3: Stocks with high earnings and rising earnings outperform stocks with low and falling earnings.

In other words, look for high quality companies with share prices already in established up trends that are cheap (price earnings), with high and rising earnings and increasing attention from the market.

Hyflux shares meet all the criteria except the action and market attention.  When these events fall into place expect some great opportunity.

We’ll look at Kurita Water Industries and  Séché Environnement SA later in this Water Investment series because water shares have been falling while the need for good water in on the rise.

Go to Part Three of this “Investing in Water Report” report. Click Here.

Gary

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priced in gold

Dollar chart from pricedingold.com (1)

The Fed has let the dollar lose most of its strength plus has allowed interest rates to fall so low, that safe investments cannot keep pace with the drop in purchasing power.

multi-currency-chart

Chart from Grandfather Economic Report (2)

Many investors have forgotten about the risk of a falling dollar because the greenback has been strong for the past five years.  This temporary dollar strength came after the great recession of 2009 just as there was temporary dollar strength after the great recession of the 1980s.  Then about six years after the recession, an agreement was made by major governments to weaken the dollar.

There was a severe global economic recession affecting much of the developed world in the late 1970s and early 1980s.  The United States and Japan exited the recession relatively early, but high unemployment would continue to affect Europe and the UK through to at least 1985.  As a consequence between 1980 and 1985, the US dollar had appreciated by about 50% against the Japanese yen, Deutsche mark, French franc and British pound, the currencies of the next four biggest economies at the time. Then the governments reached an agreement and exchange rate values of the dollar versus the yen declined by 51% from 1985 to 1987.

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There is no reason for the greenback to be  strong.

The agreement in 1985 was called the Plaza Accord.   Over just two years the greenback dropped nearly 50% versus other major currencies.  The next accord will generate great profits for those who know what to do while it ruins the purchasing power of dollar back investments.

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Over the history of US equity markets, the  price of overall markets have risen about 9.1 percent, respectively, compounded annually.  Yet over more than a hundred years of stock market activity,  a majority of the profits have come from just a very few dramatic breakouts.

Equity markets are ruled in the short term by emotions that create unpredictable ups and downs.  Numerous fears of defaults, worries of double dip recessions, high unemployment, concerns about fiscal cliffs, hold investors back.  Yet global population growth and advances in production and prosperity are relentless economic fundamentals that increase value.

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Find out which breakouts are likely to take place next.

Stocks rise from the cycle of war, productivity and demographics. Cycles create recurring profits. Economies and stock markets cycle up and down around every 15 years as shown in this graph.

stock-Charts

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns create war.

Here is the war stock cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WWIII) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Learn how the Cyber War (WWIV) may change the way we live and act and how this will affect currencies and investments.

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* Trading down and the benefits of investing in real estate in Small Town USA.  We will share why this breakout value is special and why we have been recommending good value real estate in this area since 2009.

* What’s up with gold and silver?  One session looks at my current position on gold and silver and asset protection.  We review the state of the precious metal markets and potential problems ahead for US dollars.  Learn how low interest rates eliminate  opportunity costs of diversification in precious metals and foreign currencies.

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keppler asset management chart

This chart based on a 45 year portfolio study shows that holding a diversified good value portfolio (based on a  good value strategy) for 13 month’s time, increases the probability of outperformance to 70%.  However those who can hold the portfolio for five years gain a 88% probability of beating the bellwether in the market and after ten years the probability increases to 97.5%.

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Learn how much leverage to use.  Leverage is like medicine, the key is dose.  Buffett leverages his portfolio at a ratio of approximately 1.6 to 1.  This rate of expansion by the way is called the “Golden Ratio”.  It is a mathematical formula that controls the growth of most natural things; trees, the shape of leaves, the spiral of shells, as well as the way economies and societies grow.

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Enjoy investing more with slow, worry free, good value investing.  Stress, worry and fear are three of an investor’s worst enemies.  These are major foundations of the Behavior Gap, a trait exhibited by most investors, that causes them to underperform any market they choose.  The behavior gap is created by natural human responses to fear.  The losses created by this gap grow when investors trade short term under stress.

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Share ideas about my good value portfolio.  My personal investment portfolio comes from a continual analysis of international stock markets and a comparison of their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.

Markets included in this portfolio are:

• Norway
• Australia
• Hong Kong
• Japan
• Singapore
• United Kingdom
• Taiwan
• South Korea
• China

These markets have been chosen based on four pillars of valuation.

• Absolute Valuation
• Relative Valuation
• Current versus Historic Valuation
• Current Relative versus Relative Historic Valuation

Learn how to use Country ETFs to easily construct a diversified, risk-controlled, equally weighted representative country portfolios in all of these good value countries.

To achieve this goal my portfolio consists of Country Index ETFs that track an index of shares in a specific country.  These country ETFs provide diversification into a basket of equities in the good value countries.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

This is an easy, simple and effective approach to zeroing in on value because little management and guesswork is required.  You are investing in a diversified portfolio of good value indices.  A BUY rating for an index does NOT imply that any stock in that country is an attractive investment, so you do not have to pick and choose shares.  You can invest in the index which is like investing in all the shares in the index.  All you have to do is invest in an ETF that in turn invests passively in all the shares of the index.

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The Test for Low Cost Trading

Research put every part of this portfolio in place, except knowing the best, easiest and least expensive way to buy.  A search for an optimal way to buy and hold boiled down to two methods.  One tactic to test was to use a unique online broker that appeared to offer the lowest cost deal.  The other approach was to use a community bank in Smalltown USA.  The small town bank that I use looks after my 401K trust account and their service is first class.  The benefit of small banks is that they still treat us as a human beings (instead of a number) and when we need, it’s easy to go right to the top to answer a question or get a problem resolved.  There are no call centers and the bank and the person looking after my account is just around the corner.

I created a test to see which offered the least expensive service.

Working with my banker in Smalltown USA,  I created two accounts, one at the online broker and the other at the bank. I placed $40,000 in each.

I set up the order for the country ETFs online, while my trust manager set up orders for the identical amounts of the same shares in his system.  Then we got on the phone, coordinated our timing and on a count of three each pushed the button “BUY”.

The results of this test  show how you can gain on any purchase of country ETFs.

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ecuador-seminar

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Gary

 

Gary

(1) Dollar chart from pricedingold.com

(2) Grandfather Economic Report

 

Read  DBS downgrades Hyflux to hold