Highlighted companies: Aqua America Inc. (WTR), Pentair Inc. (PNR), Watts Water Technologies Inc. (WTS), Veolia Environnement SA (VE), Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), General Electric Co. (GE), Suez (SZE), ITT Corp. (ITT), American States Water Co. (AWR), United Utilities plc (UU), PowerShares Water Resources ETF (PHO)
Summary: The water sector is on fire: The Stanford Washington Research Group Water Index of 20 U.S. and international stocks has returned 131% in the past five years (vs. 4% in the S&P 500). "Much of the easy money has been made, but investors willing to cast their nets a bit wider can find compelling bargains." Barron's profiles six such companies:

(1) Aqua America Inc. (WTR): They provide water and waste-water systems to 2.5M customers. They are the "leading acquirer" in the sector, having snatched-up over 100 smaller fish in the past five years. Current revenues are about $500M, and rate increases are between 3-5%. As the industry leader, WTR is well positioned to benefit from government infrastructure spending estimated at $280B over the next 20 years. Shares ($22.90) trade at 27x estimated earnings, but are cheaper than their March high of $29.79. Management targets 7% annual revenue growth and a 5% dividend yield; analysts say it should have no trouble reaching these. "If the company stays on course, its shares could appreciate more than 20% in the coming year -- continuing a decade-long trend of 25%-plus annual gains."
(2) Pentair Inc. (PNR): They make fluid-handling systems and industrial products; sales of water and waste-water pumps are 74% of its $3B in sales. It is the dominant player in the water-components market; analysts believe it could attract buyers, perhaps within a year. It is boosting its share-buyback program, streamlining management, and expanding in emerging markets such as China. At $29.51 it is 16% off its March highs, and trades for 14x estimated earnings of $2.12/share. "Earnings could rebound sharply and push the stock back to the mid-30s."
(3) Watts Water Technologies Inc. (WTS): Maker of valve and flow-control products. It has doubled its business in the past five years, mainly through acquisitions. It has been expanding overseas; over 30% of its business comes from Europe and China. They too stand to benefit from government infrastructure investment (see above). A housing-market slump and higher copper costs could pose problems. WTS has a history of beating analysts projections; it reported a 32% increase in Q2 sales, and a 12% increase in EPS ($1.67) last year. At $36.22 (down from a $40.03 high in May) it trades at about 16x earnings. "Earnings per share could jump to $2.16 this year, and grow by 15% in each of the next three years."
(4) Veolia Environnement SA (VE): Water revenues account for over 30% of the French company's €25B revenues; other industries include energy and transportation. It is the world's largest water utility, and stands to benefit from an estimated $600-$700B European water investment over the next 20 years. More than half of its business comes from outside France, and France itself is the world's second-largest water consumer per-capita (U.S. is #1). Its shares fell recently on news it may acquire Italian builder Vinci, but rebounded when the deal fell through. Its shares (€47; U.S. depositary receipts $59.29) are 16x 2007 earnings. "If Veolia focuses on cutting costs instead of striking potentially disruptive deals, its shares... should remain buoyant, and profits could grow by 18% a year."
(5) Companhia de Saneamento Basico do Estado de Sao Paulo (SBS): The Brazilian company is the Americas' largest water utility and #3 worldwide. Last year's $2B in sales came mainly from contracts with municipalities. It has been awarded rate increases that exceed the rate of inflation. Last year net profits jumped 69%, and it is expected to grow annual earnings at a rate of 10% (industry average is 8.5%). Its ADRs ($31.31) have gained 88% since last November, but its shares still trade at just 8x earnings. Investors worry about 50% state ownership, and the possibility the government could enact non-shareholder-friendly policies. "The water market in South America should grow 4% a year, and SBS is one of the best ways to play it."
(6) Sinomem Technology (SINO Singapore): A water treatment provider. It stands to benefit from China's pledged $125B for water treatment and infrastructure in the next five years; the Chinese market is expected to increase by 20% annually. It is still a small player: sales were $51M last year. It trades for S$0.91; Goldman has a S$1.09 target. "John Dickerson of Summit Global recommends that investors buy a basket of Singapore-listed water-related stocks, including Sinomem, Hyflux (HYF Singapore) and Bio-Treat Technology (BIOT Singapore)."