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When you throw away a piece of garbage, you probably don't think much of it. But, behind that overflowing trash can is an entire industry profiting from your waste disposal. Though it may not sound exciting, trading waste disposal stocks can be profitable. After all, there's always going to be trash needing collecting.
One of North America's largest waste services companies is Waste Management (NYSE: WM). The company owns an international network of 413 collection operations, 370 transfer stations, 283 active landfills, 131 recycling outfits, 95 landfill gas projects, 17 waste-to-energy plants, and 6 independent power production plants.
Not only the biggest, Waste Management is also seen as the best. The company is known for having premiere garbage collection and disposal services, along with the most advanced energy conversion and recycling operations.
In fact, its innovative recycling business is helping spur growth. This January, Waste Management acquired the nation's largest private U.S. recycling company, Greenstar. The move is helping improve recycling abilities and capacity. By 2020, Waste Management intends to recycle at least 20 million tons of material, up from about 9.5 million tons at present.
The company is also progressive in its ability to convert waste to energy. It currently generates up to 550 MW of renewable energy each year, enough electricity to power over 1 million houses. Its goal is to produce enough electricity to power 2 million homes by 2020.
Waste Management has become a leader in landfill gas to energy (LGTE) technologies. This involves enabling biogases -- produced organically in the landfill -- being turned into usable compressed natural gas to fuel the company's truck fleet.
In 2012, more than 1,400 Waste Management trucks ran on natural gas -- the largest North American fleet of heavy-duty trucks running on clean-burning natural gas. The company plans to continue to convert its 18,000 vehicle fleet from diesel to natural gas. Management estimates doing so will save money and reduce diesel consumption by 11 million gallons annually.
Moving forward, increased construction -- which causes increased waste -- should also contribute to Waste Management's growth. According to the U.S. Census Bureau, March building permits increased 17.3% from the year-ago period. In addition, housing starts soared 46.7% from the year-earlier period.
From a technical perspective, the stock appears strong. Since hitting a low near $25.77 in August 2011, the stock has gained about 48% to date.
For over a year, between early 2012 to early 2013, shares consolidated in a narrow trading range between support near $30 and resistance around $34.85. This tight trading activity created a holding pattern known as a rectangle.
Generally, rectangles resolve in the direction they are first broken. In January 2013, shares broke above $34.85 resistance and have been making their way higher ever since. The stock is currently sitting on the intermediate-term uptrend line.
Four the past four weeks, shares have encountered resistance around the $39.50 level. On April 10, the stock hit a multi-year high at $39.49. Shares have retreated slightly this week, presenting a potentially profitable buying opportunity.
If $39.49 resistance can be broken, the stock would bullishly complete an ascending triangle pattern, marked by the intersection of overhead resistance and the uptrend line. The measuring principle for a triangle projects a potential price target of $48.80 ($39.49-$30.18 = $9.31; $9.31+$39.49 = $48.80). At current levels, this target represents about 28% returns.
The bullish technical outlook is supported by strong fundamentals. For the upcoming first quarter, scheduled to be reported April 24, analysts expect revenue will notch up 2% to $3.4 billion from $3.3 billion in the comparable year-ago period. And they expect full-year 2013 revenue to increase 2.6% to $14 billion from $13.65 billion last year.
The earnings outlook is similar. For the upcoming first quarter, analysts expect earnings will increase nearly 8% to $0.41 per share from $0.38 in the year-earlier period. And analysts estimate full-year 2013 earnings will rise almost 5% to $2.18 per share from $2.08 last year.
In addition to a strong technical and fundamental outlook, the company offers an appealing forward annual dividend yield of about 3.7% ($1.46 per share). This dividend is not likely going away anytime soon. Management recently boosted the dividend for the 10th year in a row and stated their commitment to raising the dividend, along with growing earnings.
Risks to consider: Continued sluggishness in the economy could result in reduced consumption, ultimately translating to less garbage produced, which is bad news for a waste company. However, an improving economy will presumably result in higher material consumption, which should, in turn, generate more overall waste.
Economic factors aside, Waste Management is making headway by recycling and developing environmentally friendly, cost-cutting waste-to-energy alternatives that should help sustain the company for years to come.
Recommended Trade Setup:
-- Buy WM on a break above $39.49 resistance-- Set stop-loss at $34.60, slightly below current support-- Set initial price target at $48.80 for a potential 24% gain by late 2013
Most investors won't be committing new money to stocks given all the uncertainty... but they should absolutely do this.
While the sector is hanging on by a thread, shares of this company have already started breaking down.
Management is taking decisive action to dramatically turn this company and its shares around.