Treasure Stocks Hiding in Your Trash

Of course we've all heard the saying, "One man's trash is another man's treasure." This statement couldn't be truer for the stock market. As a matter of fact, the whole market revolves around this principle -- shares of companies are routinely discarded by investors and quickly snapped up by others, perhaps seeing a golden opportunity.

Beyond this broad generalization, though, investors may not be aware that there really is cash hiding in trash: A number of companies operating in industries related to waste and disposal have trashed the market over the last several years. With increasing public focus on a clean environment, investors would be wise to sniff around some smelly stocks others tend to shun.

Talking trash
Let's say that at the dawn of the new millennium, instead of opting for tech, you cast your focus back a few centuries and bought trash instead. If you dropped $10,000 into each of these trash haulers and disposers at the time, here's how you would be faring today:

This portfolio of trash haulers has posted absolutely thrilling near-40% annual returns. Even the worst performer, Waste Management, beat the S&P with 12.5% annual returns over this timeframe.

Trash trends
There are a few major trends that have been driving growth in the garbage sector lately. The first is fairly obvious -- growth in consumer spending on disposable items in growing populations leads to more trash. Conglomerates such as Procter & Gamble (NYSE:PG) and Kimberly-Clark (NYSE:KMB) are making billions off disposable diapers and paper products. More waste means more landfills, recycling centers, and treatment facilities -- the sweet spot of a company such as Waste Industries.

Another trend is the rise in industrial waste services. As more companies utilize hazardous products in production facilities, government regulations require someone to clean up the mess and protect the environment. Clean Harbors, for instance, will handle just about any deadly waste known to man -- if it stinks, eats holes through steel, or even explodes, they'll still take it. These types of services are critical for companies to remain in compliance and obviously require specialized training to be performed properly.

What makes trash so valuable?
While many waste companies like these have had a great run lately, there's certainly no guarantee that every trash stock out there will make you rich. Just as in other industries, investors need to look for the fundamental components that make up great businesses -- a growing market, high insider participation, and solid management execution. The ever-growing piles of trash by themselves aren't enough to make a great stock.

But one aspect of waste industries that always makes it attractive is, well, just how darn unattractive it is. Investors are quick to overlook such boring and dreadful means to fund retirement, leaving opportunity for sharp investors to pick up a strong business at a value price.

Undaunted by the foul stench of old poopy diapers, Motley Fool Hidden Gems lead analysts Tom Gardner and Bill Mann actually enjoy digging in the trash to find Hidden Gems with great potential. Click here for a free 30-day trial and see what small and ignored winners they've come across lately.