Unlike oil, gold, and other such commodities, water is one commodity we must have in order to live. I don’t even think about it. I don’t have to. Clean water is delivered to my home and where I work. It’s always available, and it’s cheap. Will it always be this easy?

Living in Arizona, one of the nation’s fastest growing and driest states, I thought back to a discussion I heard on National Public Radio about population migration. I remembered this startling prediction: the Southwest will be riddled with ghost towns when water runs out, and those looking back 50 years from now will be mystified as to why people ever wanted to live there. Last year 26 percent of the Southeast was covered by an "exceptional" drought – the National Weather Service’s worst drought category.

Consider these worldwide facts from the United Nations’ Human Development Report 2006:

1. Less than 1 percent of the world’s freshwater is easily accessible.

2. 1.2 billion people lack access to freshwater, and 2.6 billion are without adequate sanitation.

The water industry should be ripe with investment opportunities. I put together a group of 18 stocks - certainly not all-inclusive of ways to participate in the industry - to begin to find out:

• Domestic water utilities: York (YORW), Pennichuck (PNNW), Middlesex (MSEX), Connecticut (CTWS), Southwest (SWWC), Artesian (ARTNA), SJW (SJW), American States (AWR), Aqua America (WTR) and California (CWT).

• Manufacturer of tubes and fittings used in water distribution systems, Mueller Industries (MLI).

• Water safety and flow control products developer, Watts Water Technologies (WTS).

• Water treatment chemicals and services company, Nalco (NLC).

• Flow control equipment maker, Flowserve (FLS).

• Maker of pumps and fluid control equipment, Gorman-Rupp (GRC).

• Manufacturer of products to purify water and air, Calgon Carbon (CCC).

• A water treatment service based in France, Veolia Environment (VE).

• Developer of desalinization plants and water distribution systems in the Caribbean, Consolidated Water (CWCO).

I used Fast Track to get a quick study on the group and find potential buy ideas:

1. These are mostly small cap stocks and are not widely followed on Wall Street. Of the 18 stocks, 13 have market capitalizations under $1 billion. Nine of the stocks are covered by three analysts or less.

2. Financial leverage is high, with long-term debt to total capital averaging 40.9 percent, ranging from 0 percent for Gorman-Rupp to 74.1 percent for Nalco.

3. Free cash flow was negative at 10 companies in 2007. Seven companies posted negative free cash flow in each of the last five years. These are all utilities.

4. Price/earnings ratios were below their five-year high/low average on 13 stocks. Only two stocks, Mueller and Watts, also had price/earnings to growth ratios that were below both their industry and the Standard & Poor’s 500.

5. California Water was the only company where management was a net buyer of stock.

6. Wall Street is not particularly enamored with this group of stocks. There are 40 purchase recommendations out of a total of 86 ratings, so there’s room for ratings upgrades. Aqua America seems to be the darling of the group with 10 analysts following the stock and nine recommending purchase.

So here’s my take:

1. I was disappointed to find that Flowserve was the only stock that passed my Fast Track screen, having failed no more than three categories. But Flowserve is really a play on oil and gas, which accounts for 41 percent of its business, as opposed to 6 percent for water.

2. Only three companies, Veolia, Flowserve and Calgon, did not report disappointing earnings in any of the last four quarters. But Wall Street analysts have held their earnings estimates steady at 12 companies.

3. No company in the group delivered consistent earnings growth in the last five years.

I’ve decided to stay on the sidelines for now.