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Why Waste Management Inc. Might Be Worth Throwing Out

By Brian D. Pacampara, CFA – Feb 19, 2014 at 8:55PM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Waste Management (WM 0.30%) slipped nearly 1% in premarket trading today after Wunderlich Securities downgraded the waste management company from buy to hold.

So what: Along with the downgrade, analyst Michael Hoffman lowered his price target to $45 (from $52), representing about 8% worth of upside to yesterday's close. While contrarians might be attracted to Waste Management's earnings-related pullback yesterday, Hoffman thinks that its appreciation potential remains limited given the relatively poor performance of its waste to energy and recycling segments.

Now what: According to Wunderlich, Waste Management's risk/reward trade-off is pretty balanced at this point. "WTE and Recycling remain margin and FCF drags: They actually underperformed expectations in 2013 and are not expected to be better than flat y/y in 2014," noted Hoffman. "Recycling is in a multi-year change in the operating model and WTE does not need to be owned 100% by WM for it to get the strategic advantage of disposal." With the stock now off more than 10% from its 52-week highs and boasting a 3%-plus dividend yield, however, those short-term concerns might provide patient Fools with a juicy long-term income opportunity.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Waste Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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