When looking for stocks to buy in a falling market, there are two distinctly different approaches. The first is to buy those hit hardest on the way down. That is based on the logical expectation that a recovery will come at some point, and when it does, those stocks will bounce back faster and further. The other is to buy things that have held up better than others, on the assumption that they will continue to outperform whether the market keeps falling or bounces back.
Logically enough, the second approach works better when the declines continue for some time, and that looks to be the case right now.
Even if we don’t fall a lot further, a strong bounce back cannot come until there is an agreement on trade, and that doesn’t look imminent; there is no end in sight to the trade war with China.
Every day seems to bring a more belligerent statement from one side or the other, with this morning being no exception, and last week we learned that the president sees tariffs as his weapon of choice in any dispute, whether economic in nature or not.
Until quite recently, the markets regarded the tough talk as just so much bluster, but now, led by the traditional indicators of trouble ahead, Treasuries and oil, there are warning signs everywhere that this could drag on for some time and do real damage to growth and earnings.
That makes buying an underperformer just too risky. Those hit hardest on the way down this time are stocks of companies that stand to lose the most as the trade issue drags on. Conversely, stocks that have fared better than most have often done so on the basis that the trade issue will have limited direct effect on their business.
One of those, Waste Management (WM), is hitting new highs this morning, even as the broader market is once again trading lower. This is one of the best options out there for investors looking to deploy cash in this market weakness.
This morning’s jump is attributable to analysts’ upgrades of the stock, but as you can see from the chart above, it is nothing new. WM is up around six percent since May 1, during which time the S&P 500 has lost seven percent or so. The lack of sensitivity to a trade war is partly responsible, but there is another reason.
It is one that suggests that Waste Management will continue to outperform, whatever the direction of the major indices: It is simply a very well-run company in a growing business.
One of the analysts upgrading the stock this morning, Derek Spronck at RBC Capital, cited the company’s “unique positioning within its sector” as a reason to be bullish. That positioning is not an accident. It has been achieved by having and executing a clear plan for growth, and by making some strategic acquisitions along the way. That is a recipe for continued success.
What is surprising is that despite hitting record highs and having a proven, sustainable growth strategy, WM is not particularly expensive. The stock has a trailing P/E of around 25. That is above the S&P 500 average of 21 but looks very reasonable for a company that has consistently beaten earnings and growth expectations.
In many ways, WM can be seen as a classic defensive stock. Their business is not particularly sensitive to economic conditions domestically, and certainly not internationally. What differentiates it from many others that are considered defensive though is that outperformance in a down market is not a case of just standing still as others drop away. The company is poised to continue growing and consolidating its dominance of their industry and, on that basis, it is one of the best places to be this summer regardless of what happens to the broader market.