Before we get into the meat of today’s tease, I just want to note that Stock Gumshoe has now crossed a significant mile marker: As of this morning there have now been 10,000 comments published on the various articles I’ve written in this space (closing in on 750 articles — your Gumshoe is getting a bit long in the tooth). I know that for many of you the comments and additional discussion are likely to be as useful as any unveiling I can do for you, so thanks to those of you who have participated in the past, and let this serve as more encouragement for the rest of you: comment away!

But first, of course, I must insist that you read my blather.

Today we’re looking at a teaser from Andy Obermueller for his Government-Driven Investing newsletter, which we’ve looked at a couple times in its relatively young life (mostly ethanol teasers so far, you can see those articles here). And it’s a doozy — lots of folks have forwarded this one to me for the consideration of the Thinkolator, and I can’t thank you enough, this is exactly the kind of story that keeps the fire running hot here at Stock Gumshoe.

Here’s the tease:

“A Technology So Powerful Saddam Hussein Once Kidnapped the Inventor to Get His Hands on It…

“A Solution So Valuable It Could Save California… And a Company So Profitable it Could Return+257% in the Next Year Alone!

“Obscure Norwegian Inventor Creates a “Perpetual Motion Machine” To Solve the Biggest Crisis of the 21st Century!”

Masterful copywriting, really — if you can squeeze in foreign intrigue, California and perpetual motion you’ve got my attention — and profits of 257% wouldn’t hurt, either.

The story about the Saddam Hussein abduction is a great one, I’ll let Obermueller share his version of it for you here:

“Iraqi helicopters crossed the border with their guns blazing, dropping their payload of Special Forces and Iraqi Republican Guard squads to secure strategic locations.

“That same night, the air raid sirens awoke Norwegian inventor, Bjorn Hakken*, from a deep sleep.

“He quickly learned that this was no drill. And there was no time to waste. He rushed to his laboratory at the Kuwait Institute of Scientific Research and began to destroy key documents related to his work.

“Saddam’s people were not only looking to take over Kuwait’s oil resources. They were looking for advanced technology. And they knew they could find it at the Kuwait Institute of Scientific Research.

“Kuwaiti forces were vastly outnumbered by the Iraqis. They were quickly overrun. And within just five hours Saddam had seized the country. He soon announced that Kuwait had become the 19th province of Iraq.

“And Bjorn Hakken had become a prisoner of war…

“What Did this Unknown Inventor Hold That Was of Such Great Value?

“Hakken’s journey to Kuwait was an unusual one. He did not have a background in science. He was actually a college dropout. He didn’t work for a major corporation. In fact, he was previously a carpenter.

“But the nature of his work was so vital to the Middle East — and his invention was so revolutionary — that the Kuwait Institute of Scientific Research rolled out the red carpet.”

The little asterisk next to Hakken’s name, by the way, is because they used an alias — sharing his actual name, of course, would make it far too easy to research this company without subscribing to Andy Obermueller’s newsletter. Not enough to throw your friendly neighborhood Gumshoe off the scent, of course, but sneaky nonetheless.

So what did he invent? It has to do with water desalination, obviously a big deal in the deserts of the Arabian Peninsula, where much of the world’s desalination investment is still focused — in the words of the tease:

“You see, Hakken had invented a device that could single-handedly solve the world’s water crisis. It was a revolutionary machine that could operate at an efficiency of 98%.

“That level of efficiency is simply unheard of in modern mechanics. It is just two points away from perpetual motion!

“But this was no laboratory curiosity. The purpose of the device was to make it cost effective to turn seawater into fresh water. Desalination was long thought of as an impractical and very expensive way to obtain water.”

“Hakken’s” design and plans were apparently lost in the war, here’s what Obermueller says about him:

“Along with thousands of other foreigners, Bjorn Hakken was captured by the Iraqis. They moved him to a strategic location, where he was used as a human shield to deter attack by the International Coalition.

“Fortunately, he was soon released. Saddam never got the plans or the device… but neither did Bjorn. He and his wife left Iraq with little more than their freedom and the clothes they were wearing.

“They soon arrived in the United States, and he started his work all over again.

“You’ve seen how long it can take to bring a car from concept to the showroom. Or how long it takes a vaccine to make it from the laboratory to the doctor’s office.

“Now imagine a brand new, revolutionary technology that can revolutionize the way we get the most vital resource on the planet, and having to build it from scratch… TWICE.”

He then goes into describing what the device does, and that the original inspiration for creating such a device was to efficiently pump cool seawater to Hakken’s brother’s farm to chill his vegetables, using the force of water going back down the hill to help pump the water up the hill to the farm — here’s a bit more from Obermueller:

“Before long, he developed a rudimentary device. But he soon realized that the applications for it were FAR greater than pumping water to his brother’s farm.

“To perfect the device, he needed advanced materials and precision manufacturing. That’s how he ended up in Kuwait… and ultimately as a prisoner of war in Iraq.

“After starting over in the United States, he took on investors. And he began to consult with some of the leading materials scientists in the world.

“You see, the mechanics of his device worked perfectly. It was the materials that proved difficult. The extreme friction and corrosive saltwater caused even the most advanced space-age alloys to gall and seize.

“After years of trial and error, he discovered a corrosion-resistant synthetic sapphire, three times harder than steel, to produce the inner workings of his device.

“And it worked!! In fact, it worked so well, that the Discovery Channel recently called his invention ‘the most significant engineering breakthrough in a lifetime.'”

He goes on to focus on the looming water crisis in California, and the critical problems that seem just beyond the horizon as the cities continue competing with agriculture for diminishing supplies of clean water. And yes, with a growing population the water shortages certainly go far beyond California and the Middle East.

So the big looming solution is desalination — which Obermueller rightly points out has been around for a long time, with relatively well-understood and effective technology … but which has also always been prohibitively expensive, if you have any other options, because of the huge energy cost. Desalination works by either turning water to gas, (which is the same way we already generate a lot of our electricity, burning gas or coal), or by forcing water through membranes, which requires and constant pumping. And it’s no surprise that most of the big desalination plants have historically been built in places with lots of energy and money and no water. Here’s how the ad puts it:

“If water were oil, then discovering an inexpensive way to take the salt out of seawater would be the equivalent of finding an unlimited number of Saudi Arabias. And the company I am about to tell you about has done just that!

“ONE COMPANY Holds the Rights to the Technology that Has Solved the World’s Water Crisis!”

And then we get some more specifics about this particular company and its stock:

“Overall, this device can reduce energy consumption by up to 60% compared to traditional methods of desalination. It can also double production with the same size pumps!

“Is it any wonder this company dominates their market?

“Invest TODAY and an Ocean of Profit is Yours

“The simplicity and efficiency of this company’s technology is unsurpassed. So it’s no surprise they now control 70% of their market… and growing!

“It’s already used in more than 20 countries to provide drinking water for 25 million people per day. The firm’s customers are saving an estimated $350 million a year in energy costs.

“And with powerful patent protection, this is no commodity. The company enjoys gross margins over 64%.

“The company has no debt. And as you can imagine, revenues are skyrocketing.

“Over the last four years, revenues have grown at a compounded annual rate of +49%.

“And profits are following right behind… increasing +553% in the last four years!

“The best part — and the reason I am writing you today — is that this stock is dirt cheap to own right now.

“In fact, you can get shares for less than the price of a six-pack of bottled water.”

So who is it? Well, we feed all those goodies into the thirsty, thirsty Thinkolator and find that this company is …

Energy Recovery (ERII) — you can get an instant trend analysis on ERII by clicking here (hint: it ain’t in an uptrend), from one of my advertising partners.

That name may ring a bell for some of you who’ve been filling your glass at the Gumshoe tap for a while now — this stock was teased very heavily by another newsletter, Alternative Energy Speculator, over the Summer (since which it’s down a bit, though the stock has been quite volatile for much of it’s life, it went public less than two years ago around $8.50, popped to $11 the first day, and now trades at around $6.35). I speculated in some options on this stock last year, which were a flop, but the story remains a pretty strong one.

And if you want to hear all about the Norwegian inventor (really named Leif Hauge, he lost his piece of the company a long time ago) and the Iraq connection (which is not as thrilling and movie-worthy as it perhaps sounds in the ad), there was a good article on Energy Recovery in Forbes last Fall. Maybe that’s even where Obermueller got the idea, I don’t know. Forbes actually has had a fair amount of coverage of this stock, with some other good commentary by Sramana Mitra about the venture investment in ERII and the technology, and after it became clear that ERII was becoming one of the few successful (for a while, at least) IPOs of 2008.

The device they sell is more commonly called a pressure exchanger (theirs has the super-unsexy name “PX”), and it’s used to help recycle a lot of the energy used in the water pumping apparatus that makes reverse osmosis desalination happen — they use the force of the outflow of water from the system to power the inflow of new water toward the filters. That’s probably not the best way to describe it, but those articles I linked to above do a far better job if you’re curious about the technology.

And though this is just one piece of a desalination plant (many exchanges might be used in one plant), it is certainly a critical piece for helping to drive down costs by increasing energy efficiency — and ERII does have the lion’s share of that market, though they are certainly not the only company either selling or working on power exchangers, their PX is not the only system being used at the world’s desalination plants, though it does seem to get the most attention for its simple, advanced, and effective design, and it does lead the market. They did actually buy a competitor with a different technology late last year, a company called PEI that develops turbine-based systems for increasing efficiency in brackish water pumping, but I don’t know if this is just a means of diversifying their product stream or if PEI was a significant competitor.

ERII may be tough to value unless (until?) desalination plant development reaches a critical mass where there’s a steady draw on their inventory — earnings are lumpy, since big orders for new plants don’t necessarily arrive on a consistent timetable, and they’re still fairly expensive, so to justify buying this stock you may to assume continued growth for their market, and their continued dominance of the market. Both of those trends may continue, but the uncertainty is one reason why this is a $6 stock after going public with enough enthusiasm to push it to $12 shortly after their IPO.

Right now there isn’t an army of analysts covering this stock (it’s pretty small, market cap around $320 million), but those who are looking at the shares expect that 2010 earnings will be twice what they earned last year (the estimate for final 2009 earnings, not yet released, is eight cents per share, 2010 is 16 cents). ERII has seen very consistent insider selling over the past year, but that’s not necessarily a surprise, or much of a future indicator, since the stock is so recently public and one would expect the insiders to monetize their holdings after putting their sweat and tears into the company for a decade or more. There is not much institutional ownership yet, but Arvarius, a Norwegian investment fund that was an early backer, still holds about 20%, and other insiders own another 20% or so of the shares even after a year of selling.

The company is profitable, they have one key product (with several variations) that is in demand for a very specialized industry that we can probably assume will grow in importance, and so far their product seems to be holding, or growing, market share. Where you think the stock will go probably depends to some degree on how much volume you think they can drive, since for a relatively simple product like this the margins should climb as sales climb — if they do start surprising on the upside, it’s certainly possible that the surprises could be big ones … but likewise, if they go through a quarter without any big orders to supply or retrofit new desalination plants, they could easily also earn far less than expected, and lumpy earnings often scare investors.

I remain interested in ERII, though not personally a shareholder, and if the price stays down in this range and I get a handle on their future market potential I may again put some money behind that interest (not for at least three days, of course, per my rules). To me, it seems like an appealing story and a solid company and product, with a valuation that’s slowly getting more reasonable — but it’s hard to see any specific catalyst that’s going to create a quick 200%+ return. If you’ve an opinion on Energy Recovery or the other various water and desalination investment ideas out there, feel free to share with a comment below (perhaps you’ll be number 10,001!).

And if you’ve had the pleasure (or pain, I dunno) of subscribing to Andy Obermueller’s Government-Driven Investing, please click here to share your opinion.