Waste Management (WM) gathers what others spill


Julian Close 12/16/2013

In the last two weeks, a bevy of better than expected economic numbers have been released, justifying the view that the American economy is in a period of sustained slow growth and not, as the nay-sayers would have us believe, in a Japanese-style secular recession. That means that as investors, we need not speculate on emerging technologies or untested industries in order to find high returns. Instead, we should focus on those consistently profitable old-economy companies that almost inevitably do well when times are good.

This week, we are identifying a trade on Waste Management ( WM ). Trash disposal is a bread and butter industry in America and throughout the developed world. There is no economic condition in which the service is not required, and as a result, the company experienced only a minor setback to its revenue and earnings growth, a blip, really, when much of the rest of the economy was crushed by the 2008 crash. WM stock is up 50% over the last five years, and while many other stocks are up a larger percentage, the majority of these have simply been recovering value lost in the crash. To see WM's real value, consider that the stock is up 15% from its 2007 high, and has been paying a steady annual dividend (current yield 3.2%) the whole time.

But perhaps you prefer exciting, innovative companies, such as those in the alternative fuels industry. If so, look harder at Waste Management. As the largest collector of trash in the country, Waste Management gains some tangible benefits. Because it has so much garbage to work with, Waste Management has become extremely good at turning that trash into energy, both by burning it and by converting landfill gasses into natural gas. All that energy is then sold, creating an additional revenue stream. In the almost too good to be true department, this energy acts a hedge against one of the company's main risks, rising fuel prices, since rising fuel prices will henceforth increase revenue as well as expenses. Waste Management is even experimenting with converting its trucks so that they can run on the fuel it produces. That's extreme innovation.

Another exciting innovation from Waste Management is single-stream recycling. After nearly 40 years of experience, Waste Management has concluded that it can do the job of sorting materials just as easily (or more easily) if the public does not attempt to sort it themselves. That means the company can produce and sell recycled material more efficiently. Many communities have chosen to go with Waste Management as their trash disposal company simply for the convenience of single-stream. The habit of sorting trash is going to be hard to unlearn, but it is becoming very clear that the main benefit of doing this (if not the only benefit) is psychological. If we truly believe in recycling, it turns out that the best thing we can do may be to throw everything in the trash and leave the sorting to the pros.

Given the rising strength of the economy, the increasing need for alternative fuels, the advantages of single-stream recycling and the company's historically reasonable price to earnings ratio of 22.6, the chance of any significant near-term drop in the price of WM stock appears remote.

Chart courtesy of stockcharts.com

We seek to capitalize on the strength with a bull-put credit spread. Look at the April 36/39 bull-put spread for at least a $0.20 credit. Use limit orders. This trade has a target return of 7.1% over 124 days, which is an annualized return of 21%, (for comparison purposes only). The stock has to fall 10.6% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options

Referenced Stocks: WM



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