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Why Waste Management Stock Dropped 5% This Morning

By Rich Smith – Apr 11, 2019 at 1:12PM

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Trash is still good business, but recycling isn't.

What happened

Shares of the nation's largest trash collector, Waste Management (WM -0.40%), tumbled more than 5% in early trading Thursday before retracing to about a 2.8% loss as of 12:30 p.m. EDT.

You can thank investment banker Stifel for that.

Garbage man and trash truck

Don't look now, but Waste Management's stock price is getting compacted. Image source: Getty Images.

So what

This morning, Stifel downgraded Waste Management stock from buy to neutral, sparking the sell-off.

Curiously, though, the downgrade didn't have much to do with Waste Management's core trash collecting business, whose fundamentals, according to the analyst, remain strong. Rather, Stifel cited weakening prices for recycled paper at WM's recycling business for the downgrade. The analyst also said that "wet weather" contributed to expectation that Waste Management's results won't be as strong as it once believed they might be.

Now what

Waste Management stock is up a healthy 24.5% over the past year, which is both a good and a bad thing. On the one hand, it's handily outperformed the sub-10% performance of the S&P 500. On the other hand, that strong performance leaves Waste Management stock trading for 22.5 times earnings -- a high price considering that most analysts don't expect the stock to grow earnings much faster than 10% annually over the next five years.

Even if the recycling business hadn't been headed for a downturn, Waste Management's strong stock price appreciation probably means that a pause was in order.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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