A Leap of Faith: Waste Managementhttp://www.fool.com/investing/general/2012/02/29/a-leap-of-faith-waste-management.aspx Selena Maranjian
February 29, 2012
This article is part of our Leap of Faith series, in which Foolish writers each pick a stock to take a chance on for the long term.
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
When you think about taking a leap of faith in the investing arena, you might imagine taking a wild chance on a speculative stock, or relying on faith that things will turn out well despite the company's not having a proven track record or compelling competitive advantages. There's a much smarter way to take a leap of faith, though.
Think about the people or organizations in which you have the most faith. They're the ones that have generally not let you down, the reliable ones that you know well and trust, because of their proven characteristics. Apply that same kind of thinking to your investments, too. As Warren Buffett, who knows a thing or two about investing, suggests, seek companies that you trust will be making money for you in 10 years.
Not so long ago, no one imagined that companies such as General Motors, Kmart, and Eastman Kodak would file for bankruptcy protection, or that names such as Pan-Am and Woolworth's would essentially disappear. But the No. 1 name in traditional film and cameras ended up sideswiped by the digital era. Though it has valuable patents and the hope of some income from lawsuits, it recently sported a market cap of just $90 million.
We're better off with sturdier businesses, ones that seem to face little change. (Buffett likes to offer the example of Coca-Cola, as he can't imagine that a decade from now billions of people won't still be quaffing its carbonated fare.)
An inevitable business
No matter how much our world changes in the coming years, I can't imagine that we'll end up generating much less garbage. Meanwhile, recycling efforts will likely keep growing over time. In the garbage and recycling departments, Waste Management is a titan.
Here are some attractive characteristics offered by its own management at a Goldman Sachs conference in November:
"A significant portion of revenue has annuity-like characteristics." That's music to the ears of many investors. Some businesses have to work hard for every dollar of revenue, while others luxuriate in recurring revenue, such as royalties or renewals of service contracts, or membership fees.
"Cash flow is strong and predictable." This is a big boon for a business, as it enables managers to plan effectively and make smart cash-deployment decisions. It can be hard to plan for expansions or acquisitions if you're not sure how much money is coming in. That's not a big problem for this company.