Why Buffett Likes Trashy Stocks

For this weekend's Motley Fool Money radio show, I interviewed Carl Quintanilla, co-host of CNBC's Squawk Box and host of "Trash Inc.: The Secret Life of Garbage," a CNBC documentary that airs Sept. 29 at 9:00 p.m. What follows is part of our conversation.

Chris Hill: Most people I think are like me in that we think about trash once a week when it gets collected. What is it about garbage that made you want to investigate this industry?

Carl Quintanilla: I think the genesis of it probably came from watching the performance of some of these stocks, even as other stocks were getting trounced. We wondered why there was such resilience in these few public names, even as the rest of the market was getting hammered. The more we looked at it, the more we realized exactly your point, and that it may be the most misunderstood economic commodity out there because it ends up having a surprising amount of value after it is gone. But most people's experience with it is exactly as you described. You put it on the curb, it goes away, you have no idea how far it goes or how much it costs to go to that place or who is paying for it to go there. That all lent itself to what turned out to be an extremely rich look at a very strange industry.

Hill: I thought maybe you had ticked off your bosses at CNBC and they said, "I know, let's send Carl to a landfill halfway around the world."

Quintanilla: (Laughing) Try five landfills. Can I say it was pleasant? No. Did I go through multiple pairs of shoes and pants? Yes. Look, they are ridiculously advanced from an engineering standpoint, and they have even managed to find ways to minimize the odor, but would I want to spend the rest of the afternoon there, even with you? The answer is probably no.

Hill: Some of the numbers in your documentary are astonishing. Garbage in America is at an all-time high, 250 million tons a year, more than four pounds a day per person for everyone in the United States. What surprised you the most when you were working on this documentary?

Quintanilla: Well I think, well, two things, I guess. One is we all hear about the NIMBY problem, right? "Not in my backyard" is an old saying in the industry. Everybody wants it picked up and nobody wants it put down. It is a municipal economic story, but a lot of these small towns in America are making a bargain to bring these landfills in, take a cut of the fees and basically boosting their local budgets by 50%. That pays for a lot of Little League fields and community theaters. So that NIMBY problem seems to be fading, which is really interesting.

The other thing is that as we have gone through this economic rough spot, trash levels, the amount of stuff you and I throw away has obviously flattened out. Commercial trash, mostly stuff that they used to pick up from housing and commercial real estate, that has obviously cratered. So where does the industry make up the difference for that volume, that loss of revenue?

It turns out they are finding ways to turn trash, in most cases, into energy, just like Dr. Emmet Brown does at the end of Back to the Future where he pulls up in the DeLorean, puts trash in Mr. Fusion and flies away. That ended up not being that far from the truth. We visit this one BMW plant where half of the electric grid is powered by methane gas. That blew me away. I had no idea that they were that so far along in terms of energy generation with trash.

Hill: A couple of the leaders in this industry are companies like Waste Management (NYSE: WM  ) and Republic Services (NYSE: RSG  ) . At The Motley Fool, as investors, we like companies that, among other things, have a moat around them. These companies seem like they are in pretty good shape in that regard. Are there companies out there that are poised to challenge them in any significant way?

Quintanilla: It would be very difficult for a new player to come in and have their kind of vertical integration. There are hundreds, maybe thousands of private collectors, because a truck, you and I could go out and buy a truck for $250K, and we could start collecting trash in New York City and get paid, right?

Hill: Sure.

Quintanilla: But we would have to eventually pay someone else to park it, wherever it went, into the landfill. What Waste Management and Republic and those guys, the big guys, have is that chain where they own the landfill, they own the trucks. In some cases they either own or contract the rail. That is where all of their cash generation comes from and as you know, Chris, that cash is so flush and so attractive, and that is why the industry for years was a hotbed of organized crime. It was an efficient way to launder money, just because of the sheer amount of cash flow in these companies. It is incredible.

Hill: When Warren Buffett came out earlier this year with the annual letter for Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , the thing that caught my attention was that the position that he had increased the most in his holdings was Republic Services. He had more than doubled it. Is that as good an indication as any that this is an industry investors should be looking at?

Quintanilla: Well far be it from you or me to speak for Buffett, but when you look at that position and you look at Burlington Northern, I mean his bet, and granted, he is thinking on a time horizon that might not coincide with a lot of investors, but his bet long term is a play on goods moving around the country, whether they are going to the consumer or away from the consumer, in the case of garbage. That is a thesis that he has stuck with. It has been years now, and you are right, he absolutely doubled down with Republic and with Burlington. It is going to be fascinating to see if it turns out to be right, but given his track record, who wants to bet against him?

The entire interview with Carl Quintanilla airs this weekend on Motley Fool Money on radio stations across America and on iTunes.

Chris Hill does not own shares of any of the companies mentioned. Waste Management is a recommendation of both Motley Fool Income Investor and Motley Fool Inside Value. Republic Services is an Income Investor recommendation. The Motley Fool owns shares of Berkshire Hathaway, which is a recommendation of Inside Value and Motley Fool Stock Advisor. Try any of our Foolish newsletter services, free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.The Motley Fool has a disclosure policy.


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  • Report this Comment On September 15, 2010, at 1:09 PM, TMFKris wrote:

    Not only can a dump bring fees to a community, but when it's full it can be filled in and turned into recreationsl fields. Also I wanted to note that many rural people are aware of where their trash goes because they drive it to the dump or the tipping station every week.

  • Report this Comment On September 16, 2010, at 8:44 AM, energysystems wrote:

    Another interesting thing that WM does(not sure if Republic does it, but it wouldn't suprise me if they did), they capture methane and other gases and put them to use either for themselves, or they sell the gases. These are benchmark companies that aren't going away, like Buffett always says, invest in things people use everyday without realizing it.

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