4 Small-Cap Utility Stocks to Play El Nino/California Drought

Ryan Bhandari  |

If weather predictions about next year hold true (and as of now, there’s a greater than 90% chance it will), then California will experience what is known as an El Nino winter. El Nino is defined as a sustained and prolonged warming of sea surface temperatures in the Pacific Ocean. The increase in temperature creates more precipitation in the air and thus more rain in the affected areas.

Basically, California’s historic drought problems could be greatly ameliorated and perhaps subdued completely if El Nino hits California this winter. While this event would generally be widely celebrated across the state by consumers and businesses, there are a number of publicly traded water utility companies in California that will also be celebrating.

One would think that because of the restrictions and therefore severe penalties faced by water consumers who use more than the allotted amount, the performance of these water utility companies would be up because people would pay more in penalties for using more water. This hasn’t been the case though, because…

Californians Really Did Conserve

On April 1st, 2015, Governor Brown issued a statewide executive order that restricted the amount of water each household in the state could use. Governor Brown called for, among other things, a 25% reduction in water usage by the end of the year.

In the month of May, California residents cut water usage by a whopping 29% compared to May 2013. Additionally, there were a total of 28,555 complaints issued in the month of the May to county and city water boards. These complaints helped water boards target millions of gallons of water that would have otherwise gone to waste. Out of the nearly 29,000 complaints filed with water boards, 1,786 penalty payments were issued.

Californians have been committed to preserving water in light of our recent drought. So the question is, how has this affected the publicly traded water utilities companies in California?

Stocks Are Down

In the state of California, there are four small-cap publicly traded water utility companies: American States Water Company (AWR) , Cadiz Inc. (CDZI) , California Water Service Group (CWT) , and SJW Corp. (SJW) . For a point of reference, I measured the stock’s performance since April 1st of this year to see how they performed in light of the new regulations coming down from Sacramento. Since the 1st of April, all four stocks are down: SJW down 0.19%, AWR down 2.36%, CWT down 4.37%, and CDZI down 7.28%.

So the drought has actually seemed to cut into the profitability and success of these public traded utility companies in California. Thus, in the event of al El Nino winter coming up, what should these water utility companies expect?

Future Profitability of Water Utility Stocks

El Nino is going to bring a lot of water to California. The last time the state experienced an El Nino was in 1997, and California’s reservoirs were filled to the brink, with much of Northern California experiencing mudslides. Throughout the Golden State, the water was flowing.

Now though, California officials are worried that the prospect of El Nino is going to cause residents of California to discontinue their conservation techniques. If people revert back to their old ways and El Nino doesn’t actually come, the state is going to be in a lot of trouble.

Ultimately, El Nino appears likely to help water utility stocks. With current rations in place, the amount of water used across the state has dropped dramatically. This is great for the future of the state, but not for the utility companies that make money off of increased water usage.

That said, it’s still possible that El Nino doesn’t arrive as anticipated. In that case, people’s expectations of El Nino might cause them to start using more water anyways, and water utility stocks in the state will still be poised for growth as we move into the second half of this year and winter of 2016.

All told, it might be a good time to invest in California’s publicly traded water companies.

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