It's been a "water week" so far here at Green Chip Stocks.
The theme kicked off on Monday, which the United Nations declared World Water Day. The UN says that more than 1 billion people are dependent on water resources that are hard to access, disease-ridden, or simply unavailable. The United Nations Environment Program's "Sick Water" report put the result of that reliance on bad water in stark terms, pointing out that more people die each year from polluted water than from war or any other form of violence; over half of the hospital beds on earth are occupied by people who could die because the most basic element of life has been compromised.
Even though we didn't hear much about World Water Day in the U.S. press, as health care reform took every headline, Nick Hodge was invited to discuss water investments and give his five top water-related best stocks on Canada's Business News Network Monday. (I've linked that video for you at the bottom of this article so you can hear all about those plays for yourself.)
Then, Tuesday evening, I sat in with a small group of investors, civil servants, and water entrepreneurs from Israel and the U.S. at the American Association for the Advancement of Science in Washington, D.C. as they explored the best ways for Middle Eastern companies to move their own hydro-tech into the American market. In its Mediterranean location, Israel is a microcosm of the global supply and demand situation in 2010, and it's also a hotbed of innovation. But where does the rubber meet the road — or the water hit the ground — when it comes to growing profitable Israeli water-related investments that you can access?
That innovation to implementation link, or i2i, was the crux of our discussion, and I took the opportunity to follow up on years' worth of research with the experts themselves. Here's what I learned...
I've Seen This Movie Before!
As you move from the southern Negev Desert to the north near the Sea of Galilee (which is actually a lake), yearly rainfall levels more than triple from a maximum of 200 mm/year to about 700 mm. In the middle, Israel looks pretty much like California, with a semi-arid coastal plain giving way to high country around Jerusalem and forbidding terrain closer to the Dead Sea.
So since the birth of the state in 1948, handling water resources has been job one for Israeli engineers. To make the desert bloom, Netafim — a company developed on a kibbutz cooperative agricultural settlement — became the world leader in drip irrigation. Drip irrigation basically entails poking holes in a hose very close to the plants you're watering, instead of spraying a large area and suffering major losses to evaporation in the hot Middle Eastern sun.
One of the panelists Tuesday was Booky Oren, the former head of Israeli water utility Mekorot and current President and CEO of water technology company Miya. (Now, if you've ever heard an Israeli give a presentation, you may know that they like speaking idiomatic English. Listen to the Prime Minister, Benjamin (Bibi) Netanyahu sometime. His nearly flawless American accent comes from years spent in the Philadelphia area during his youth and then at Harvard and MIT, and when Bibi throws in expressions like "not throwing out the baby with the bathwater," it's like WD-40 for getting his message into Anglophone ears.)
Booky is also a fan of colorful language. At a New York cleantech conference back in 2007, I first heard him introduced as Israel's "water guru," on account of his experience with several water companies of all sizes. He dove right in to talk about the state of water supply and demand in the U.S., where important freshwater resources like the vast Ogallala Aquifer is depleted, parching parts of my home state of Kansas.
I remember how Booky began his talk a few years ago with an idiom. "We have a saying in Hebrew: Raiti et haSeret haze."
"I've seen this movie before," he quickly translated. Whichever language launched the expression first, the sabra water guru was right on... Israel's experience comes in an area the size of New Jersey where the population has multiplied 25 times in two generations (including Palestinians). Do you think the rainfall has kept up? Not by a long shot. Yet, Israel's net water consumption has remained steady since the 1960s due to early advances.
I know Kansans now using drip irrigation to grow grapes atop the drying Ogallala. The idea is remarkable for its simplicity, but what is more remarkable to me is that — having seen the movie before — Israeli water technology companies haven't been able to write a script for their own success in the best stock market in 2011.
After all, Israeli companies are second only to Canadian and American firms in the number of Wall Street share listings they have. China is getting up there, but Israeli life-science stocks like Teva Pharmaceuticals (NASDAQ: TEVA) and even car-location system maker Ituran (NASDAQ: ITRN) have built millions and billions of dollars in market cap on their ideas since the 90s. And Israeli tech wiz Shai Agassi is the golden boy of the electric vehicle world with his Better Place startup plan to put millions of EVs on the road around the world in the next several years.
Booky said a few years ago that water-tech should be Israel's top export sector in a decade. Three years closer, I wasn't hearing much progress toward that goal on Tuesday.
"I've seen this movie before... " I thought. Frankly, I expected to see a listed Israeli water-tech company on the NASDAQ by now. So I asked Booky, "What happened?" To get to the answer, we had to define what water technology really means...
Defining Water Technology for Success
From ocean, lake, or pond to pump and then spigot, through desalination, filtration, or even co-generation that gives energy and purified water at the same time, "water-tech" can touch on several sectors. Minister Ohad Cohen, the commercial attaché of the Embassy of Israel in Washington, observed that sensing technology similar to smart grid cleantech we've discussed extensively in Green Chip belongs in the realm of telecommunications. As utilities send and receive data on water usage, they can minimize wasted pumping power.
California currently devotes about 19% of its statewide energy consumption to water infrastructure, and data systems to sync water and power are worth millions to Golden State utilities.
That energy-water nexus is where I think Israeli water-tech companies will rise to prominence, but as Booky Oren told me, they're looking for a balanced approach between decades worth of track record in Israel and American utilities' reluctance to deal with international firms when it comes to delivering a resource as intensely local as water. It could be a cultural thing, where Israelis came on too strong a few years ago without the links and comfort to gain customers in each individual market within the U.S.
Former Virginia State Rep. Bob Hull, the third panelist at the AAAS meeting, spoke of helping Israel's Environmental Protection Company (EPC) to forge connections here at the state and county level. State health departments are now taking control of septic tank and well-water system standards, which would at least mean Israeli market entrants will have to convince 50 capital offices instead of countless counties and municipalities.
As understanding of smart-grid technology spreads nationwide, we should see openness to water-related sensing technologies rise as well. Then there's the matter of onside processing like reverse osmosis and aerobic treatment systems, and that's where utilities must have a sense that the water itself will be in responsible hands.
I don't need to tell you how dire things can get when water is bad — you can read the UNEP Sick Water report for yourself.
The good news is that this challenge is an opportunity, and the energy-water nexus gives us a springboard to jump into some investments. In his interview with Business News Network, Nick highlights exchange-traded funds like the two PowerShares ETFs, its Water Resources Portfolio fund (NYSE: PHO) and Global Water Portfolio (NYSE: PIO). PIO leads PHO over the past year, with a return of nearly 58% compared to just about 43%. From innovation to implementation (i2i), I want to add another "i" — and that's for best investments in 2011.