In this podcast, Motley Fool analyst Jim Mueller discusses:
- Whether people going back to offices could be a growth catalyst for Waste Management (WM -0.81%).
- The underrated subscription part of Rollins' (ROL -1.90%) business.
- How businesses like Sherwin-Williams (SHW -0.94%) can be compounding machines for shareholders.
Motley Fool user experience researcher Alicia Hammond discusses the psychological underpinnings of why we give someone "the benefit of the doubt" and how it relates to investing.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on April 7, 2022.
Chris Hill: Coming up, we'll take a closer look at the business of garbage. It's time to get trashy. Motley Fool Money starts now. I'm Chris Hill and I'm joined by Motley Fool senior analyst, Jim Mueller. Thanks for being here.
Jim Mueller: Hello, Chris. Glad to be on the show.
Chris Hill: I mentioned the other day that people listening to the podcast can post a review of the show on Apple, and if you include a question about a stock or industry or trend, then we might use it on the show. We got a great question from John. The full name as it's listed on Apple is John Son of Bill, which I love. [laughs] Here's the question. Now that people are slowly going back to offices and thus producing more trash as well as more businesses from which to pick up, do you think this could be a growth catalyst for Waste Management? We'd love to get your take on one of the unsexiest good businesses around. Thank you, John. Great question. He's right, this is a good business, this is a decidedly unsexy business.
Jim Mueller: You immediately thought of me? [laughs]
Chris Hill: Not at all. [laughs] Ticker symbol WM. Waste Management, you and I were talking before we started recording, this is one of those really good businesses that neither one of us ever thought to buy shares of. But am I correct that in the business of trash in the United States, this is the dominant player?
Jim Mueller: Yeah, it's the dominant player. It generates revenue by collecting residential trash and commercial trash and industry trash and manages the landfills and manages recycling, and probably even generates natural gas from the processes that handle trash and they run that into renewable natural gas. I do know, if not all of their fleet of trucks, the vast majority of their fleet of trucks run on natural gas. So yeah, they're big in the trash.
Chris Hill: To John's question, and I like the way he's thinking here.
Jim Mueller: So do I.
Chris Hill: Is this a catalyst for them? Because it would seem as though the underlying thesis is correct.
Jim Mueller: Yeah, it's a really good question and I like the way he's thinking, but I think he might be a little bit too late. I did a little bit of digging in and the question is, how much of the business would be boosted? Basically, he's asking, how much of the business will be boosted by looking at the revenue line by people moving back to the office and generating trash there? I think a lot of that boost has already happened. I did some looking into how many Americans might be working from home and all that and we can go into that if you want but I think the quickest way to answer this question is to look at management's projections for revenue and how revenue actually grew. If you go to pre-pandemic; 2018, 2019, management was saying, we're going to grow revenue about 4% next year for 2018 and 2019. The actual numbers were a little lighter than that, 3% in 2018, 3.6% in 2019. Then they said the same thing in 2020. This is February before the pandemic really locked down everyone in the country. Another 4% projection, and they actually dropped revenue, they declined by 1.5%. Then in 2021, looking forward, they said, we're going to grow revenue 11% and actual results was 17.8%. So a big jump in revenue. Whether that was from people going back to work in 2021 as last year's restrictions eased and more restaurants started opening up and more businesses started opening up and all that, I think that's what played through. It's not just people going back to work but all the secondary and tertiary knock-on effects of more people eating out and going to concerts and stuff like that. It brought a wave through the year. First quarter last year, 10.3% revenue growth. Second quarter, almost 26% revenue growth. Third quarter, back down to 21%, still very good but it's falling and it fell again in Q4 at 15%. Now, for this year, management is projecting "only" 6%, but that's a lot closer to what they had been projecting before the pandemic. So I think a lot of that wave of everything opening up, office workers going back to work, restaurants, and so on has already probably worked through the system for them.
Chris Hill: You look at the last 10, 15 years for the stock, it is a steady grower. Waste Management is a dividend payer. This seems like for people who are looking at their portfolio and saying, yes, I want the Rule Breaker type stocks but I also want [laughs] some steady businesses that I don't have to worry about too much, it seems like Waste Management checks that box.
Jim Mueller: Definitely. You really need a company like this to balance off some of the high-growth and the higher volatility of Rule Breaker-type high-growth stocks. It's been a strong dividend payer, it's been paying and increasing the dividend the past 15 years. The share price, over the past five years, it's gone from $72 to $160. So that's better than a double and it doubled the five years before that, so we're talking over 10 years, 16% annual growth before the dividend. It's been a very solid business tone, nice performer, fairly steady stock price. It's not always up and to the right but it's a pretty nice looking line. I'm going to have to look further into it and see if I want to buy some shares because [laughs] I did some research for David Gardner back in the day when I was working on Stock Advisor before he finally put it into the service. But I've always liked it and like what they do and their monopoly-like thing. They're the biggest owner of landfills, for instance, and they're not building many more of those.
Chris Hill: Before I let you go, John's question brings to mind the concept of unsexy businesses [laughs] which I also, as I mentioned on Waste Management, I did last year inherit shares of a few different stocks and was looking through and realized that one of them is a mini version of Waste Management. It's a company called Waste Connections, ticker is WCN. It's about half the size of Waste Management. The stock chart is similar to Waste Management's. That's probably the unsexiest business I own [laughs] shares of. But what are a couple of other businesses that you think checks the box there? Because it really is true that a lot of investors, particularly when they're starting out think in terms of confusing excitement with a rewarding stock. The fact is there are some really boring, unsexy businesses out there that can reward you if you're a long-term shareholder.
Jim Mueller: You can get very rich owning the most boring ick factor stocks around. Waste Management, garbage, who wants to deal with garbage? [laughs] That's an ick factor stock. My favorite ick factor stock besides Waste Management is Rollins, ticker ROL. They're the ones who own the Orkin brand of pest control and cockroaches, termites, bed bugs. They deal with all that. They own a whole bunch of other brands, so they've branched into Critter Control. If you've got bats in your belfry, you might want to call them. But they'll remove raccoons, for instance, and rats and foxes maybe [laughs] if they come into Capitol Hill, for example. But they're a very steady grower. Nice margins, 35% return on equity, 52% gross, 18% operating margin. They've grown their revenue by 9% a year on average over the past five years and they also pay a dividend, which they've been paying since 1987, and they raised it for something like 20 some odd years before they had to cut it a little bit in 2021 as the pandemic really got flowing. But it's a very nice business. Subscription-based, which you might not think of. But people and restaurants and hotels, especially where you don't want those critters in and the health department frowns very heavily at you if you do. So steady business, recurring revenue. They've done some work to optimize the routes that their technicians do. Given them more time to talk with the customer, hey, I just treated your house or your business for roaches. Have you noticed any other things that might be coming in that we could help you with? It gives them more chance to get more business from steady customers. It's a nice, boring, unsexy, unhip business that I own and I've been a very happy shareholder with them.
Chris Hill: I know Sherwin-Williams gets name checked a lot in terms of boring businesses. I don't think it has the ick factor that you mentioned, [laughs] which I had never thought of that before, but it's not exciting but again, it's another one of those rewarding balanced type of stocks.
Jim Mueller: Again, Sherwin-Williams, that was a Tom slash Everlasting pick in Stock Advisor. First time back in March 2008, it has returned 1660 percent since then. It's done very well and probably was the recommendation that landed with a plop the most, [laughs] Tom said at Stock Advisor. Better than 60 percent return on equity, 40 plus percent gross margin, 13 percent gross margin, revenue growth 11 percent for the past five years. It's paid a dividend since at least 1987, which is far back as my data goes. If you can reinvest those dividends, you get more shares and more dividends in the future. Just I love that compounding on [MUSIC] businesses that do a basic function, they do it very well and they do it for a very long time.
Chris Hill: Jim Mueller, it's opening day for Major League Baseball, so I'm going to let you go. Thanks so much for being here.
Jim Mueller: [laughs] Thanks, Chris.
Chris Hill: Keep those questions coming when you post a review on Apple. You can also email questions to [email protected]. That's [email protected]. [MUSIC] If you've been listening to this show for a while, you have heard me say on multiple occasions, we're in an environment right now where Wall Street is not giving any company the benefit of the doubt, which begs the question, why do we give anyone the benefit of the doubt. To help shed some light on this is Alicia Hammond, a user experience researcher here at The Motley Fool and a psychology instructor at Cuesta College. Alicia, thanks for being here.
Alicia Hammond: Thanks so much for having me, Chris.
Chris Hill: What are some of the psychological underpinnings of why we give someone the benefit of the doubt?
Alicia Hammond: Well, usually, when we're talking about the benefit of the doubt, we're going to dive into social psychology and talk about attribution theory. Attribution theory is a family of theories that describe how people assign causes to events. Let's say that event 1 caused event 2. Now, this can be anything from events, personality traits, etc., but usually, we're talking about causal attributions, which is linking an event to a cost. Saying a personality trait caused a behavior. A pessimistic attribution of style is associated with lower grades and poorer physical health. There's some real negative consequences to going about the world explaining in this pessimistic way versus if you have an optimistic attribution style. Optimistic attributional style is associated with better health, happier marriages, and more higher levels of happiness with an individual. There's some real benefits to being a little bit more optimistic when you're explaining what's going on in the world.
Chris Hill: The active investing in the stock market itself is, in many ways, an act of optimism. Thinking about attributional styles, it's not to say that you're better off going through your investing life with rose-colored glasses. But it does make me wonder if people who are more pessimistic are more likely to trade more frequently in their investing lives because the slightest miss in an earnings report, a misstep by a CEO, it's easy for me to imagine someone who has that approach. A pessimistic approach is to say, well, I'm not going to use the benefit of the doubt, I'm selling my shares of this stock. Or am I wrong? How do your attributional styles affect people's investing behavior?
Alicia Hammond: Well, to me, that sounds like a really cool opportunity for an experimental study, Chris. If I ever end up going back to grad school, maybe that will be what I do. As far as investing, taking this long-term approach requires a lot of optimism because it's like a marathon. You got to know how to keep yourself optimistic in the long run. Having this optimistic style, I would assume probably is beneficial in our particular flavor of investing.
Chris Hill: A question we get all the time at The Motley Fool, we have forever, we will continue to get, has to do with selling a stock. Look, everyone is different. Some people take a very mathematical approach to their investing, and that includes selling stock. There are people who say, well, I'm never going to let a single position get to be larger than five percent of my portfolio. No matter how I feel about this company, if it gets to be over five percent, I'm selling some. But you and I were talking earlier, there are some people who feel attachments two companies. I feel that with some of the companies in my portfolio, but you described something that I had never really heard it described this way before that not all, but for some investors, selling a stock can be like going through a breakup. Can you share some color of how and why that is?
Alicia Hammond: People anthropomorphize companies all the time. Products are anthropomorphized, mascots, brands, etc. We often describe things like, Coca-Cola is like a friendly brand, that sort of thing. Well, we can anthropomorphize whole companies in ways that are a little bit surprising when it comes to their stock price. The investors that I spoke with really described selling a stock as going to a breakout. They purchased the stock often times, many years in the past. When they're alerted to the idea that it might be time to sell for various reasons, they start to have thoughts such as, I have to overcome the idea of what I thought this company could be, and I have to come to terms with the fact that my feelings about this company have changed. Almost as if speaking about someone you're in a relationship with. They then described these factors that changed, that sounded to me a lot like the concept of red flags when you're breaking up with someone. Like a red flag for a relationship might be like incompatible values, say like, one partner wants kids and one doesn't. A red flag for a company and an investor would be something like the CEO has changed or something essential about the product has changed. The company itself, like its business structure has changed, or maybe even society has changed and that company is no longer fits into an ideal a version of society for the investors. The investors need to take stock of what has changed and overcome the like emotions that are associated with like, I've been with this company for a long time and I used to believe in them. Changing your mind is like a very cognitively difficult process, and it can be a very emotional process, and so we found that when investors are thinking about breaking up with the company, or you're thinking of selling your company, it can often really feel similar to a breakout.
Chris Hill: Now that people listening, maybe in some cases, for the first time, are starting to think about themselves in terms of attributional style. Am I someone who is likely to get the benefit of the doubt? Am I not likely to get the benefit of the doubt? What advice would you have for people now that they have a better sense of this concept of how they can put this to greater benefit in their investing life?
Alicia Hammond: We want to give our friends the benefit of the doubt, we want to give people we're in relationships with the benefit of the doubt, we want to think of their behaviors are being caused by the situations they're in and not fundamentally misaligned with our own goals and values. Give companies the benefit of the doubt when you feel negative about something that's happening. You just have to do a gut check like, is this company still aligned with my goals and values? Just as you would a friend or relationship. That helps you feel more able to trust them and hopefully, stick with them for the long term. If there's a red flag and the company feels no longer compatible with you, or say, you're investing thesis has changed, then know that it might be time to move on. But if you think of companies as friends, if you anthropomorphize them a little bit psychologically, that's a little bit easier for us to do than thinking of companies as these like massive, chaotic blobs that just have so many pieces, which they are. But there is a benefit and there is a certain ease to thinking of a company and thinking of complex objects in this way.
Chris Hill: Alicia Hammond, thanks so much for being here.
Alicia Hammond: Thank you for having me.
Chris Hill: That's all for today. But coming up tomorrow, we'll dig into the business side of the masters and the start of the Major League Baseball season. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.