Finding opportunities in water stocks: Analyst

How to play water
How to play water   

Problems with the water supply in Toledo, Ohio, highlight the need for improvement in the nation's water infrastructure, and the best way to play that is by investing in water utilities, an analyst told CNBC.

"What we're looking at is these [bigger] water utilities … to be able to grow by investing in infrastructure, by consolidating the smaller, private systems and hopefully by helping to privatize or work with the municipal systems on solutions to situations like this," Gabelli & Co.'s Tim Winter said in an interview with "Street Signs."

Read More Drink up? Toledo mayor says water now safe

There are more than 55,000 separate water systems and a majority of them serve customer bases of less than 3,000, he noted. About 80 to 85 percent of the country is served by municipal systems.

A sign warns of algae infestation at Maumee Bay State Park, August 4, 2014 in Oregon, Ohio.
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A sign warns of algae infestation at Maumee Bay State Park, August 4, 2014 in Oregon, Ohio.

On Monday, the mayor of Toledo lifted a three-day ban that left more than 400,000 people without drinking, bathing or cooking water. The ban was triggered after heightened levels of the chemical microcystin was discovered, which was likely caused by algae blooms.

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Winter has "buy" ratings on American Water Works, California Water Service Group and Aqua America. He has a "hold" rating on American States Water for now, but said he will be looking for opportunities to get back into the stock.

When playing the water utilities, Winter said investors need to think long-term.

"It's a slow moving industry. A lot of it has to do with the politics involved in running a water utility," he said. "These are long-term themes that are going play out."

—By CNBC's Michelle Fox