One Pretty Darn Compelling Stock

"I don't want a lot of good investments; I want a few outstanding ones."
 -- Master investor Philip Fisher

With these words as inspiration, I took up the challenge to find one pretty darn compelling stock for you to consider.

What exactly was I looking for?
If you've read about Philip Fisher's storied investing career, you know he looked to buy great companies at reasonable prices and hold them for the long term.

To help identify a reasonably priced long-term play, I used three criteria. The company had to be:

  1. Likely to be around in 20 years
  2. Easy to understand, but hard to love
  3. A dividend payer

Why these three?

Since we're looking for a long-term play, the first criterion is obvious.

Meanwhile, the easier a company is to understand, the less likely we'll be surprised by a downside we hadn't considered. The problem is that if it's easy for us to understand, it's likely well-understood by others -- and therefore normally priced fairly to expensively. Think Starbucks (Nasdaq: SBUX  ) , Amazon.com (Nasdaq: AMZN  ) , and FedEx (NYSE: FDX  )

This is where the hard-to-love part comes in. Another master investor, Peter Lynch, loved boring stocks. But, he noted that "better than boring alone is a stock that's boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal." Why? Because the stock is less likely to be expensive due to being too popular with investors.

Finally, I made sure the company paid a dividend. Three reasons for this:

  1. A company committed to paying a regular dividend shows fiscal responsibility.
  2. Returning cash to shareholders forces management to prioritize initiatives due to a smaller budget.
  3. Dividend stocks have performed beautifully historically and are a great play right now.

In short, I went looking for a less well-known but equally avoided version of Altria (NYSE: MO  ) .

What I found
I'll admit it. My top two candidates are trash. Almost literally.

Together, Waste Management (NYSE: WM  ) and Republic Services service roughly 70% of America's trash disposal needs.

Likely to need trash services in 20 years? Check. Easy to understand but hard to love? Check. Solid dividends? Check.

But the story gets better.

These companies are more than just the trucks that pick up your trash each week. On the back end, they run recycling, trash-to-energy, and landfill operations.

Believe it or not, it's the landfill operations that provide these companies with a huge advantage on their competitors. If you don't own your own landfill, you're forced to pay "tipping fees" to those who do. Since Waste Management and Republic Services control vast networks of landfills, they are able to generate significantly higher margins than their smaller competitors by charging them for the use of said landfills.  

One man's trash ...
With the industry consolidated into an effective duopoly, both of these companies are in an excellent position. They provide essential services in an industry that has built-in barriers to entry (it takes three to seven years and loads of "not in my backyard" headaches to get a zoning permit for a landfill). Their duopoly also gives them an above-average ability to raise prices. 

Now I promised you that I'd narrow this down to one pretty darn compelling stock, not two. In a duopoly like this where both competitors are well-run, the macro industry dynamics trump individual company differences.

For an analogue, see the credit card industry. MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) run similar business models and are more worried about long-term threats to the industry and keeping out new competitors than they are about destroying each other. As a result, I generally prefer whichever one is priced more favorably.

One pretty darn compelling stock ... revealed
It's similar for Waste Management and Republic Services. There are differences, but they are not so vast that I absolutely prefer one versus the other. Value is my main arbiter. And by that measure, Waste Management is the stock to buy.

I'm not alone in my respect for both companies. The analysts at our Motley Fool Income Investor service have recommended both Waste Management and Republic Services, citing many of the same reasons I listed above. They believe both companies have compelling future prospects and sustainable dividends. However, for new money right now, the team does prefer one over the other; Waste Management is currently one of five stocks on their "Buy First" list. I invite you to see all five stocks on the list by accepting a free 30-day trial. Click here to get started.

Anand Chokkavelu owns shares of Altria. Republic Services and Waste Management are Motley Fool Income Investor picks. Waste Management is an Inside Value pick. Amazon.com, FedEx, and Starbucks are Stock Advisor recommendations. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2010, at 1:24 PM, Ironbob wrote:

    So compelling involves a company that has 8X more debt then cash? Whatever.

  • Report this Comment On April 09, 2010, at 2:45 PM, TMFEditorsDesk wrote:

    @Ironbob,

    Yes, Waste Management has a good deal of leverage: debt/equity = 141%. It is something to watch, but it's been able to cover its interest payments consistently...in the last 5 years, its lowest annual EBIT/interest payments ratio has been 3.7. It is currently at 4.7.

    Waste Management's free cash flows have been fairly consistent with its reported net income.

    -Anand (TMFBomb)

    PS...EBIT = Earnings Before Interest and Taxes

  • Report this Comment On April 09, 2010, at 6:07 PM, plange01 wrote:

    will massey energys top executive be put on trial for murder in the deaths of the 25 miners?

  • Report this Comment On April 09, 2010, at 6:53 PM, ironyworks wrote:

    The local environmental folks regarded WM as almost Mafia, using unfair business practices and environmental tokenism.

    The trash business in many areas has been traditionally Mafia territory and WM either is them or is behaving in their tradition..according to some of the folks who have to deal with them at the county level.

    Why are there only 2 companies in a business with such low barriers to entry. All municipalities recognize the necessity of landfills.

  • Report this Comment On April 10, 2010, at 2:44 AM, AlexanderAkhavan wrote:

    Waste management companies do not have low barriers to entry.

  • Report this Comment On April 10, 2010, at 12:33 PM, plange01 wrote:

    best chance to make some big money in a well known stock would be in research in motion (rimm)..this company is doing well and when extremely overpriced apple breaks down this one will benefit most..

  • Report this Comment On April 10, 2010, at 1:10 PM, ET69 wrote:

    WM has a poor management team. Look at Seattle. Allied Waist its local competitor has already signed their contract with the union but WM is being obstinate. As a result the union members are "working to rule" and we all know what that means- decreased efficiency. Additionally when their contract comes up for renewal there will be blow back and they may loose their contract to their competitors. Local politics WILL play a role. Nor do they own the trash transfer facilities-- the city of Seattle does. So Seattle is not dependent on them.They are creating a lot of negative feeling against them in this city AND this seems to be their M.O. ,as in Los Angeles WM is a dirty name ( pardon the pun). a penny rich pound poor attitude is a sure loser long run.

  • Report this Comment On April 10, 2010, at 4:10 PM, srmorb wrote:

    The idea of now investing in a waste management business now makes as much sense as investing

    in some bycycle manufacturer's 1908 gizmo called

    a spark plug (Look up Albert Champion,remember Albert Champion, as in A.C. Spark Plugs.)

    I have met with an executive of Envion. This is an industry that has developed a means to recycle plastic bottles into transportation fuels. They told me that they are keeping close conenection with

    Waste Management. I believe it's for the provision

    of their business' raw material .

    I'm just waiting for Envion to go IPO. In the

    mean time, I can see investing in WM.

    I have sinced came up with a proverb that can

    be connected with the waste management industry.

    One man's garbage is another man's gold.

  • Report this Comment On April 12, 2010, at 11:36 AM, Maui808Gal wrote:

    Is there no way to stop these Craigs List wanna be's from posting their web site / sales pitches on the Fool's comments pages? WTH? These have NOTHING to do with the artilce or investing...unless the connection is.....purchasing trash?

    beachbum

  • Report this Comment On April 12, 2010, at 2:58 PM, TMFEditorsDesk wrote:

    @kahakaiBum,

    We are deleting them as soon as we find them. You can help by reporting spam comments (the little hand button on the upper right).

    -Anand (TMFBomb)

  • Report this Comment On April 12, 2010, at 11:50 PM, gfischer13 wrote:

    great write-up!

    nevertheless nothing wrong with owning both, WM and RSG. I actually come up with a better valuation for RSG than WM; as do Buffett and Gates, as you know.

    I wouldn't be surprised if RSG takes the same path as BNI into BRK's portfolio in a couple of years.

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