Could Cadiz Quench So Cal's Thirst?

Beyond energy or the quality of the environment, the most important condition for sustaining life is the presence of water. We simply can’t survive without it, and demand for it is rising.

Over the past 100 years, Earth’s population has tripled and water requirements have skyrocketed. You can swap natural gas for oil or solar panels for electricity, but when it comes to water, there is no known substitute.

In recent years, several mutual funds have launched to tap into the investment demand for water, including Claymore S&P Global Water (CGW), PowerShares Water Resources (PHO), Calvert Global Water (CFWAX) and Kinetics Water Infrastructure No Load (KWINX), among others. Most own engineering, desalinization and other industrial companies.

One small-cap stock off the radar screen offers a regional but risky play on the need for water in the growing West. Cadiz (CDZI) is a publicly-traded land and water resource company that owns 45,000 acres in California’s eastern San Bernardino County, much of which hosts large underground water resources.

Wet in the West

Stock price of Cadiz (CDZI) over 2 years.

Cadiz also maintains an agricultural operation, growing table grapes, citrus, squash and beans, and the firm says it hopes to eventually use its acreage for solar energy generation.

This is a speculative bet. Cadiz has experienced losses on operations, and its limited resources mean that more capital will likely have to be raised, diluting existing shares. Another risk factor is that water is a highly politicized and bureaucratic business, dependent not only on the quality of a firm’s resources but also on the strength of its political pull. With a $165 million market cap and only 25,000 shares traded a day, Cadiz is more of a private equity investment than a traditional common stock.

Yet, local demand appears sustainable. Dozens of water agencies throughout California have imposed mandatory rationing. Regardless of the health of the economy, the state’s seemingly unquenchable thirst for water is unlikely to abate. Companies poised to fill that need should benefit in the quarters ahead.

Four years ago, we wrote about the case of Kelo et al. v. City of New London et al., wherein the Supreme Court permitted a Connecticut municipality to use eminent domain to confiscate private homes in order to turn land over to developers. The Court reasoned that the new development, a hotel, condominiums and a Pfizer (PFE)-led research park, would benefit the community by adding more jobs and tax revenue than the existing private homes could.

Now, after dozens of private homes were bulldozed, the grand plans have been scuttled amid the economic slowdown. Local taxpayers have coughed up nearly $80 million dollars to prep a site for Pfizer, who has paid the city all of $4 for the property. Pfizer has announced it will leave the city altogether, relocating some 1,400 jobs as a result of cost cuts. The site is a vacant lot.

Meanwhile, another court is poised to commit exactly the same injustice. In a decision that went largely unnoticed among the Thanksgiving headlines, the New York Court of Appeal ruled the state can force Brooklyn homeowners and businesses to sell their property to make way for a huge new development that will include a new arena for the New Jersey Nets. Tenants argued the seizure is unconstitutional, but developer Steve Ratner applauded the ruling, saying “this project represents a significant public benefit for the people of Brooklyn and the entire city.” Hmm.. Where have we heard that before?

Because the public is only a collection of individuals, the “public benefit” can never be accurately defined. What is clear is that the $5 billion project benefits Ratner, who we can assume would not appreciate seeing his family’s home bulldozed for the public good. Pity he doesn’t have the same compassion for the property owners whose land is soon to be seized for his project.

When it comes to protecting property rights in this country, our memories seem to get shorter and our mistakes more damaging and expensive. When will we learn?