Profiting From Trash: 3 Waste Management Stocks to Consider

Market expected to grow at 6% annually between 2018 and 2025

Don't let bears trash talk the stock market amid its recent challenges. In fact, "trash" might be the perfect place to scan for opportunities as volatility persists. Waste management stocks look set to benefit as the world's population continues to increase and become more urbanized. Allied Market Research projects the global waste management market to register a 6% compounded annual growth rate (CAGR) between 2018 and 2025 to reach $530 billion.

Combine this with reduced locations to dump garbage along with innovative new technologies that enhance collection and recycling solutions, and the not so glamorous industry suddenly looks appealing as a defensive play.

Stifel analyst Michael Hoffman recently pointed out in a research report cited by Barron's that the waste management business is capital intensive, highly regulated, provides an essential service, generates ample cash flow, and has the potential for small, tuck-in acquisitions that enhance existing networks. Furthermore, 80% of sales are service-based, reducing the industry's dependence on the economy's overall health to offer a level of protection against a possible recession. Hoffman also believes that pricing and recycling-contract improvement add additional tailwinds to the space.

"Solid waste [players are] on pace in [2019] to produce reported price [gains] of 2.5% to 5%," the Stifel analyst said. "[Network] density and asset utilization help support price power," wrote Hoffman.

Although the waste removal services segment trades at a premium to the S&P 500 from a forward earnings perspective – about 27 times compared to 18 times – these three industry players should continue to thrive for the characteristics outlined above. Let's take a more detailed look at each stock and rummage for some possible trades.

Waste Management, Inc. (WM)

Waste Management, Inc. (WM) provides waste management services to residential, commercial, industrial, and municipal customers in North America. The Houston, Texas-based company announced in April that it had agreed to acquire Advanced Disposal Services, Inc. (ADSW) for about $3 billion to expand it presence in the eastern United States. Waste Management reported second quarter (Q2) earnings per share (EPS) of $1.11, exceeding Wall Street expectations of $1.07 per share. Revenue also came in better than expected, increasing 5.5% from the year-ago quarter. Management credited healthy yield and volume growth in the company's collection and disposal business for its strong top-line performance. The upbeat financial results mark the fourth consecutive quarter that the garbage giant has topped analysts' earnings projections. Trading at $117.75 with a market capitalization of $49.95 billion and offering a 1.75% dividend yield, the stock has returned 33.47% year to date (YTD), outperforming the waste management industry average by 5.66% as of Aug. 28, 2019.

Waste Management shares have traded in a steady uptrend since late December, with only several minor retracements to the 50-day simple moving average (SMA) during the advance. The recent pullback to an eight-month trendline provides a suitable entry point to swing traders to join the trending stock. Think about booking profits using a trailing stop exit to let profits run. For example, consider moving stops beneath each subsequent higher swing low. Protect trading capital with an initial stop-loss order positioned under this month's low at $112.87.

Chart depicting the share price of Waste Management, Inc. (WM)

Republic Services, Inc. (RSG)

With a market cap of $28.42 billion, Republic Services, Inc. (RSG) engages in non-hazardous solid waste collection, transfer, recycling, and disposal services for municipal, residential, and energy services customers in the United States and Puerto Rico. The 23-year-old company operates roughly 195 active landfills and more than 200 transfer stations. Republic continues to look for suitable acquisitions and has already spent $143 million on mergers and acquisitions (M&A) activity this year, setting it on track to surpass its original acquisition guidance of $200 million. Like Waste Management, Republic Services has a track record of delivering outstanding bottom-line results, having surpassed analysts' earnings estimates over the past four consecutive quarters. As of Aug. 28, 2019, Republic Services stock issues a 1.84% dividend yield and is trading up 23.94% on the year.

Apart from a 6% pullback in mid-April, the company's share price has continued to make higher highs throughout 2019, indicating that a strong trend remains intact. Those who wish to buy the stock should seek an entry at the $88 level, where the price encounters key support from a trendline extending back to late December and the 50-day SMA. Once in a trade, consider using a multiple of risk to bank profits. For instance, a stop order placed below the August low at $86.34 represents risk per share (RPS) of $2.27, assuming an execution at Tuesday's $88.60 closing price. Traders could then set a take-profit order at $93.14 – two times RPS.

Chart depicting the share price of Republic Services, Inc. (RSG)

Waste Connections, Inc. (WCN)

Waste Connections, Inc. (WCN) provides waste collection, transfer, disposal, and recycling services in the United States and Canada. It operates roughly 90 active landfills, more than 145 transfer stations, and about 66 recycling centers. In 2019, the $24.07 billion company has forged deals that provide three new market entries in Colorado, Illinois, and Iowa, as well as signing tuck-in deals in Colorado, Montana, Nebraska, New York, and Wyoming. The company posted in-line Q2 earnings, while revenue for the period came in above Street expectations by $9.2 million. Additionally, the waste management player bumped its full-year 2019 revenue guidance from $5.31 billion to $5.38 billion. The company's stock has gained 23.60% YTD as of Aug. 28, 2019. Investors receive a 0.71% dividend yield.

Waste Connections stock rallied nearly 40% from its late-December low to its early July high. However, since that time, the price has pulled back to a crucial support zone at the $88 level. The relative strength index (RSI) shows a reading below 50, giving the price ample room to make another attempt at testing the 52-week/all-time high at $97.76 set on July 3. Those who buy the stock at current levels could place a stop beneath either the Aug. 23 low at $88.91 or Aug. 5 low at $87.81, depending on risk tolerance.

Chart depicting the share price of Waste Connections, Inc. (WCN)
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