Finding The Green In Garbage

By Aaron Levitt | April 24, 2011 AAA

When investors think about green investing, alternative and renewable energy generally are at the forefronts of their minds. Funds like the PowerShares Global Clean Energy (NYSE:PBD) have become popular ways to play the trend. However, there are other, perhaps more practical ways to play the cleantech revolution. The ever-increasing cost of commodities makes recovering used material through recycling increasingly economic. Recycling and environmental services may offer more of a green "slam-dunk" for investors.
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More Than Just a Landfill

The United States generates more than 800,000 tons of garbage each day, and most consumers are blissfully unaware of what happens to that trash. However, there is gold in that garbage. As the world's population continues to increase, a variety of commodities are being stretched to their limits. More food, energy and materials are all needed to support the planet's new citizens. This ever-increasing amount of consumption has an unintended side effect: more waste. The environmental services sector offers a play on both these fronts. First, it does so by rerouting some of the waste generated by our throw-away society through recycling efforts. The recycling industry has grown by leaps and bounds in recent years. The long-term rally in commodity prices will continue to buoy efforts to recover raw materials from used items. A wide variety of industries such as automobile fabrication to infrastructure are relying more on recycled materials to help keep costs down. In addition, consumer electronics contain an abundance of silver, platinum, lithium and rare earth elements.

Secondly, new technologies are making it possible for that garbage to become energy. As chemical reactions and microbes digest the waste in a landfill, it creates methane gas. Many landfills are now collecting this gas and burning it as a way to power homes and vehicles. Even more exciting is the promise of future cellulosic biofuels made from agriculture and food scraps. Annually, the U.S. generates over 250 million tons of municipal solid waste. Much of this consists of organic compounds that can be converted into transportation fuels. Privately held Fulcrum BioEnergy recently inked a deal with trash hauler Waste Connections (NYSE:WCN) to provide feed stocks for its new Sierra BioFuels Plant. Any technologies that can turn trash into transportation fuels will ultimately benefit the companies that transport garbage and own landfills. Potentially, this will create future revenue streams for the traditional garbage companies.

Garbage's Green Plays

While the waste management sector generally follows the overall strength of the economy, the sector does represent an interesting green play. Many emerging markets are just now beginning the process of seriously dealing with their waste streams. Domestically, the continued increase in commodities pricing will make recycling efforts even more lucrative. For investors looking for broad bets on the sector, both the Market Vectors Environmental Services ETF (NYSE:EVX) and the new Global X Waste Management ETF (NYSE:WSTE) follow a diverse basket of different stocks within the waste management sector. However, with anemic trading volumes, investors may be better off in individual names within the sector.

One of the biggest beneficiaries will be the scrap metal recyclers. Reports from a variety of analysts suggest sustained higher ferrous scrap prices in years to come. Operating across five continents, Australian firm Sims Metal Management (NYSE:SMS) remains the world's largest metals recycler and makes a great play on the theme. Similarly, Schnitzer Steel (Nasdaq:SCHN) and lead specialist Metalico (NYSE:MEA) offer exposure as well.

With more than 6,000 landfills across the United States, the potential is huge for landfill gas power. Currently, only about 500 of those landfills have been tapped. As the two largest environmental services companies in the United States, both Waste Management (NYSE:WM) and Republic Services (NYSE:RSG) have been very active in the area. Cummins (NYSE:CMI) produces a variety of generators designed to run on alternative gases including landfill gas. These three stocks can be considered the starting forwards in the industry.

Bottom Line

It's a dirty job, but someone has to do it. For investors, the environmental services sector offers one of few green "slam-dunks". With higher commodities prices here to stay, companies that provide recycling and waste-to-energy applications will be big winners in the future. The previously mentioned stocks offer investors a way to play the long-term trends. (For related reading, also see The Biofuels Debate Heats Up.)

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