Winning stocks can be found in some of the most unlikely places.
During this appearance on Motley Fool Live, recorded on Feb. 11, Motley Fool Co-Chairman and Chief Rule Breaker David Gardner joined Industry Focus host Nick Sciple to discuss some gems he has unearthed among companies focused on trash. It might not have the glamor of tech or entertainment businesses, but Gardner makes the case for why less-appreciated businesses can be long-term winners.
Nick Sciple: I think the one that was most interesting for me is trash. There's two different companies that have been in the trash category. I want to talk about both of them, but why is trash in the David Gardner Rule Breaker universe? Why is this something that jumps out to you?
David Gardner: Yeah. Well, first of all, we need to get rid of it. We need to collect it, we need to process it. One of my biggest pet peeves of all, and I've done full podcasts just around pet peeves. But one of my very biggest is littering, I think that there is zero excuse for anybody to litter. I don't care what culture you're from, what neighborhood you are in, I think there is zero. You are not allowed in my mind to litter. I always loved it seeing the $500 fine if you litter. I'm not sure anybody ever gets charged for that, but I really, really don't like littering and trash. I love that were cleaning it up for profit out there. The companies that you're mentioning are just great companies. Isn't it awesome to think that we live in a world where people go to work every day, cleaning up for others and get paid for it, and actually paid enough that they can pay a dividend and grow great companies over time. I'm really grateful for this. I think, Nick, I realize it doesn't sound that exciting. It's not like biotechnology genomics. We're talking about trash. But I'm all about what's a better world? What's the world that you and I want to live in? I've often said in the past, make your portfolio reflect your best vision for our future. Well, certainly, an area on niches you're mentioning that I favor is a cleaner world. These companies do that.
Sciple: Yeah. The first one, we'll bring up Waste Management (WM 1.13%). The second most recent rec among the companies, we'll talk about recommended in June 2019. One of the largest waste management recycling companies in the world controls about 20 percent of the market. That may give it away to your right there, 20 percent of the market in an industry that is absolutely necessary. But what jumps out to you about waste management as a stock for folks who invest in?
Gardner: Yes, all of those things are true. That WM logo on trucks in my neighborhood, yours, and lots of other people too, I really think that the company has ensconced itself in our society, and I think it's really well protected from competition in the sense of doing work people don't generally want to do and it's doing it at scale. I think it has that brand piece. I realize this is slightly all these things, not like an Apple (AAPL 0.17%) or Netflix (NFLX 1.56%) brand. But really, waste management isn't my favorite phrase to say either, you bought WM, I think it's worth really respecting what they have done. I think Wayne Huizenga, by the way, was one of the co-founders and this comedy guy ending up owning all the Florida's sports teams and doing a lot of good work besides. He's no longer with us, but part of his legacy, which reminds me that so often, these companies are created by real visionary types of people. To do that decades ago and for this company to be thriving today is a great sign. They are a big dog in this field, and I think we're all well rewarded typically for finding these companies. I will mention, Nick, thanks again to your diligence, that the stock has not been a great performer. It's basically flat with where I recommended it in June of 2019. We're coming up almost two years now and the market is up 35 percent and we're flat. That's disappointing to me. But you know what? Not everything wins or wins all the time. I like this kind of company for the next couple of decades.
Sciple: I don't think the demand for the services they provide aren't going down anytime soon so we'll see what happens next with this company. The other why that they popped out to me in the trash sub-sector was company I had never heard of, and so I started doing some preparation for this podcast. That's Darling Ingredients (DAR -0.55%), ticker DAR. David, how did you find this company?
Gardner: I'm glad you asked. I found this company in 2012. One of my favorite things about The Motley Fool, something that I helped create is Motley Fool CAPS. I'm assuming a lot of our podcast listeners would be familiar and a lot of our Motley Fool Live fans will be familiar, but not everybody. I just want to make it clear that caps.fool.com is a free site on the Internet, it's part of The Motley Fool, and you can come in and rate stocks. You can thumb up a stock because you think that stock will beat the market, or thumb it down. Sometimes if you have a bad consumer experience, like you waited too long in line somewhere, you can go right on CAPS and thumb it down and it makes me feel better. But you're ultimately making calls about the stock. Do you think it's going to beat the market or lose the market? Either way, we'd love to hear from you. A lot of people have contributed to that over time. You get rated, you get scored against everybody else playing CAPS. It's an addictive game for people who really love the stock market. Well, one of the small features of CAPS, Nick, is you get a Stock of the Day. There's just a new company, a ticker symbol each day if you check your CAPS page, if you sign-up for CAPS. So I have used that over the years to create list of companies I hadn't heard of, that I could research further, and I have culled those over the course of time. A lot of my research process is to go through my CAPS Stock of the Day Suggestions. Again, this is just the service suggesting a stock that is thinks I might be interested in, and Darling Ingredients, earlier that same year of 2012 popped up on my radar. I looked at, and I had never heard of it either. But Nick, you've got a little bit about the business to make it clear why maybe we all would have not because this company has been around for a hundred plus years.
Sciple: Yes, it's the nation's leading provider of a rendering, recycling, and recovery solutions to the nation's food industry. It processes 10 percent of the world's inedible meat byproducts and is the largest collector and processor of used cooking oil in North America. Okay.
Sciple: You hear that description. Why is that something folks should be excited about investing in. What's the investment case here?
Gardner: Well, it's in the same niche. They were timers, talking about cleaning up the world. Actually, you have a great stat here that you let me know about ahead of time, I'd forgotten this, but basically, for every pound of meat produced, there's one pound of inedible meat produced. What do we do with that? What about all that cooking oil? This is a company that's helping clean up restaurants, and kitchens, slaughter houses. It's one of those companies you wouldn't otherwise have heard of unless you're a stock market fan and maybe a Motley Fool Stock Advisor member, because members have owned the stock if they listen to us nine years ago for nine years and counting. It's ended up being a pretty good performer. Very happy. That always makes me feel good where we're beating the market. But from my standpoint, this is one of those companies that most people will never have heard of, Darling Ingredients, ticker symbol DAR. But those are some of my favorite stocks to find, especially when they outperformed the market over long periods of time.
Sciple: Yeah, David, I just wanted to give you a couple of numbers. Part of the really exciting thesis for Darling Ingredients is they take all these byproducts and you can use it to produce different ingredients. One of the things that they have is they own a 50 percent stake in Diamond Green Diesel, which is a partnership with Valero (VLO -1.03%), one of the biggest refiners in the world. They produce renewable diesel here in the United States, the most economic US facility, largest in the US, second largest in the world. Back when around the time David first recommended this stock, that additional production capacity of 160 million gallons a year. In 2021, they have plans to expand that production capacity to 675 million gallons a year in 2021, so increasing it to another 400 million. They also have looked through to 2023, they plan to open a new facility in 2023 or they're going to increase their total annual production to 1.2 billion gallons of renewable diesel. That's almost a 10X for when they first develop that facility almost 10 years ago. It's a really incredible growth. A little over 10 years whenever that facility is done so, just incredible growth. We can only imagine, and obviously, this is huge push toward more greener fuels, there's going to be lots more demand for that type of renewable diesel going into the future. Company that has had a lot of success, a lot of growth, but it looks like even more growth ahead in a niche that I don't think anybody is going to come take away the beef tallow market from them.
Gardner: That's part of the beauty of a great industrial company. They're doing something that's hard. It might be lower margin is often unattractive, but darn it, if they're doing it and doing it well, they are providing real value of the society. They may be overlooked, they're certainly not in anybody's hot stock list. One other thing I have to say about Darling Ingredients, Nick, is if you and I were having this conversation one year ago, I wouldn't have been that happy about Darling Ingredients because the stock, after holding it for seven, years from 2012 to 2019, it was basically flat with when I first recommended it. All of the appreciation is now a triple. Now more than tripled our money and as beating the market here nine years later. But all of that appreciation that's happened in the last 12 months.