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Tickers in this Article: WTR, CWT, PG, BWTR, SWWC, AWK, HOO
I never thought I'd say this, but if you're looking for consistently hot stocks right now, try the water utilities industry.

No, I'm not kidding. The Dow Jones U.S. Water Index (DJUSWU) is the six-month, four-week and two-week leader for all the major Dow Jones industry indices. It's up 20.4% for the last six months and gained 15.5% over the last two weeks. It may not be the most fascinating set of stocks in the world, but considering the S&P 500 is down 42.8% for the last six months, I'll take a boring moneymaker.

But Why?
So, what separates a mundane water utility stock from, well, pretty much every other stock out there? The obvious answer is also the correct one - it doesn't get much more recession-proof than water. Consumer staples stocks like Procter & Gamble (NYSE:PG) are supposed to survive a bear market because basic consumer needs like soap and toothpaste don't change, even in a tough economy. Let's face it, though - you might switch to a cheaper brand of soap, but you can't switch to a cheaper water utility company. The option of not using water anymore isn't really an option either. Now that's recession-proof! (Find out what to do when the sun sets on a burgeoning market in Recession-Proof Your Portfolio and Seven Ways To Recession-Proof Your Life.)

But That's Only Half The Story
While water is highly regulated, some of these companies are surprisingly profitable anyway. When removing the three unprofitable stocks from the group of 13 major water utility stocks listed, you get an average price-to-earnings ratio (P/E) of 18.4 (ttm), and a net profit margin (MRQ) of 14.1%.

Those three losing companies? American Water Works (NYSE:AWK), Basin Water (Nasdaq:BWTR) and Southwest Water (Nasdaq:SWWC). Obviously the three net losers can't be overlooked, but in two of the three cases, profitability is within reach in the foreseeable future.

American Water Works took a massive one-time charge in the first quarter of the year, which will cause a loss for the year. However, the quarters before and after Q1 were solidly profitable. Southwest Water, though warned it was out of compliance with Nasdaq listing requirements and was at risk of losing its listing, has been oh-so-close to being profitable. For the last two quarters, its net loss ($607 thousand and $793 thousand) was only an average of 1% of total revenue for those six months.

And Basin Water? Well, let's just call it the bad apple of the group. Ten profitable companies out of 13, and almost 12 out of 13, isn't much to complain about.

The Best Of The Best
I could justify some interest in several of these names based on fundamentals alone. However, if I can also keep the wind at your back - by combining strong fundamentals with currently rising stocks - so much the better. So...

Let's Start With Aqua America
Aqua America
(NYSE:WTR) has rallied 72% off its October 10 low of $12.20. The P/E has been a victim of such quick movement, it's standing at a hefty 29 right now. However, consistency and reliability can command such a premium. The company is on track to raise revenues for a fifth consecutive year, and it's on pace to increase earnings per share (EPS) for the fourth year in the last five (and the oddball year only missed matching the prior year's EPS by a penny). Next year, at 84 cents per share, it's expected to once again beat the current year's estimate of 74 cents per share.

If you still can't get on board with a utility stock that's trading at a multiple of 29, consider the other major rising star in the group - California Water Service Group (NYSE:CWT). The stock is up 30.9% from July's low, although it has been sickeningly volatile between then and now. The P/E multiple is a more tolerable 21, and earnings are growing at a rapid 60.7% on a year-over-year basis.

If you're willing to venture into the smaller water companies, the fundamentals can be even more attractive. Take Cascal NV (NYSE:HOO), for instance. The current P/E multiple of 7 seems impossible; the 11.5% net margin isn't too shabby either. Better still, over the last two quarters, revenue was $87.3 million, up 12% from the six-month period a year earlier. EBITDA was up 5.1% at $33.4 million for the same six-month time frame. However, the stock lost 24.8% since that November 11 announcement to the November 21 close of $4.25.

Bottom Line
My point is this: Pick and choose carefully if you go shopping. Some good companies may still make for bad investments.

For more, read Water: The Ultimate Commodity.

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