We recently compiled a list of the 8 Best Water Stocks To Invest In. In this article, we will look at where Xylem Inc. (NYSE:XYL) ranks among the best water stocks to invest in.

The water industry is grappling with a unique set of challenges and opportunities as the demand for clean and safe drinking water continues to rise globally. According to the American Water Works Association’s (AWWA) State of the Water Industry Report, there is increasing scrutiny on water quality and access standards, while the sector simultaneously faces pressures from aging infrastructure, water scarcity, emerging contaminants, and evolving cybersecurity threats. The convergence of these issues has made it essential for industry professionals to adopt innovative solutions, foster collaboration, and make strategic investments in people and technology.

This dynamic landscape presents both risks and opportunities for investors looking to enter the water sector. Companies operating in this space are not only focused on ensuring reliable access to drinking water but also on pioneering technologies that address complex issues such as water purification, distribution, and resource management. The report notes that watershed and source water protection, once considered secondary concerns, have now emerged as the top priority for water utilities. This shift reflects a growing recognition of the importance of safeguarding water sources to maintain a sustainable and affordable supply.

In 2024, watershed protection surpassed the perennial challenge of aging infrastructure, which has long been a concern for water utilities. Contributing to this shift are various factors, including the prolonged impacts of climate change, drought conditions, and the threat of contaminants such as per- and polyfluoroalkyl substances (PFAS). PFAS have become a major water quality concern due to their presence in numerous industrial products and their potential to harm public health. Addressing this issue alone is expected to cost the industry nearly $40 billion in capital improvement investments. This underlines the financial and operational hurdles that water companies must overcome, making it a pivotal year for those at the forefront of water resource management.

Despite these challenges, the industry is taking proactive steps to enhance water quality and infrastructure resilience. The Bipartisan Infrastructure Law (BIL) has provided some relief, offering funding to support capital projects, which in turn helps address concerns about aging systems. Utilities are also increasingly implementing water protection plans, with over 61% of respondents in the AWWA survey indicating that they have already integrated or are in the process of integrating source water protection initiatives. This proactive stance demonstrates the sector’s commitment to long-term sustainability.

One of the more critical developments in the water industry is the integration of new technologies. Investments in digital solutions, advanced treatment methods, and green alternatives are expected to more than double over the next one to three years. The adoption of such technologies is seen as “very important” by utility operators and “extremely important” by service providers, according to the AWWA report. The focus is on maximizing the lifespan and performance of existing systems while simultaneously exploring eco-friendly innovations that can bolster water system resilience. This creates a fertile ground for companies specializing in technological advancements to thrive, as they cater to the industry’s growing demand for efficient and sustainable solutions.

Another pressing issue for water industry is cybersecurity. As utilities increasingly rely on digital infrastructure, they become more vulnerable to cyber threats, which pose significant risks to water operations and the privacy of customer data. The survey found that 67% of participants view cybersecurity as a “very” to “critically” important issue, and 82% believe that cyber threats would have a “slight” to “significantly negative” impact on the water sector. Despite these concerns, smaller utilities often lack the resources to enhance their cybersecurity posture, creating a security gap that could lead to severe disruptions. Addressing these vulnerabilities is crucial as utilities look to secure their operations against growing cyber threats.

Looking ahead, water utilities must continue to adapt and innovate to meet the evolving challenges of the industry. Climate change and its associated extreme weather events, for instance, pose a growing threat to water resources and infrastructure. Droughts, water shortages, and unpredictable weather patterns have made it imperative for utilities to adopt robust water management strategies. Consequently, companies that provide solutions for water conservation, infrastructure renewal, and climate resilience are well-positioned to capitalize on these emerging trends.

The water industry’s focus on source water protection, technological innovation, and infrastructure resilience, coupled with its commitment to addressing cybersecurity and climate change, makes it a compelling sector for investors. Companies that are leading in these areas have the potential to drive significant returns while also contributing to the sustainability and safety of global water resources. In the following sections, we explore some of the best water stocks to invest in, analyzing their strategies, performance, and potential for growth in this complex and ever-evolving industry.

Our Methodology

For this article, we sifted through ETFs and online rankings to identify 15 possible companies that operate in the water industry. We then chose the 8 stocks that were the most widely held by hedge funds, as of Q2 2024. The list is arranged in ascending order of the number of hedge fund holders in each firm.

At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A technician opening a valve in a water infrastructure facility.

Xylem Inc. (NYSE:XYL)

Number of Hedge Fund Holders: 50

Xylem Inc. (NYSE:XYL) is a major player in the water industry, providing innovative solutions for water infrastructure, smart metering, and water treatment. It is widely regarded as a water stock due to its focus on water-related technologies and services, which are essential in addressing global water challenges. As of Q2 2024, the stock was held by 50 hedge funds, up from 45 in the previous quarter, indicating increasing institutional confidence in its long-term growth potential.

In the second quarter of 2024, Xylem Inc. (NYSE:XYL) reported strong financial performance, surpassing analysts’ expectations. The company posted earnings per share (EPS) of $1.09, beating the consensus estimate of $1.05. This 11% year-over-year EPS growth highlights the company’s robust profitability and effective cost management. Total revenues rose by 26%, with organic revenue increasing by 9%, driven by strong demand in its Measurement & Control Solutions (MCS) and Water Infrastructure segments.

Xylem Inc. (NYSE:XYL) EBITDA margin for the quarter was 20.8%, up 170 basis points compared to the prior year. The company achieved a solid margin expansion thanks to increased volume, price realization, and productivity gains. The MCS segment, in particular, delivered an impressive performance, with revenue up 26% and EBITDA margins increasing by 700 basis points. This growth was fueled by higher demand for smart metering solutions and backlog execution, reflecting Xylem Inc. (NYSE:XYL) ability to capture market opportunities effectively.

Moreover, Xylem Inc. (NYSE:XYL) integration of Evoqua Water Technologies is progressing well, leading to cost synergies and enhanced commercial capabilities. The combination is expected to generate $100 million in cost synergies by the end of 2024, positioning the company for further margin expansion. Additionally, Xylem Inc. (NYSE:XYL) balance sheet remains strong, with a net debt-to-adjusted EBITDA ratio of 0.7x, and its year-to-date free cash flow increased by 200% compared to last year, reflecting improved cash flow generation. Given its solid financial position, strategic acquisitions, and a positive outlook for revenue and margin growth, Xylem Inc. (NYSE:XYL) is well-positioned to benefit from ongoing demand for water solutions. The company’s strong fundamentals make it an attractive investment for those looking to gain exposure to the water industry.

Artisan Mid Cap Fund stated the following regarding Xylem Inc. (NYSE:XYL) in its first quarter 2024 investor letter:

Overall XYL ranks 1st on our list of the best water stocks to invest in. While we acknowledge the potential of  XYL to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XYL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.