God is in the Details

My return to the waste management business

Published on:
February 2, 2019
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Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He  serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Analyst Credential (CFA).

One way to find stock ideas is to look at yourself. From the restaurants that you eat at to the clothing stores that you visit, these companies are often publicly traded. While writing to you, I am drinking coffee from Starbucks (SBUX on Nasdaq), checking (too often) my iPhone (AAPL on Nasdaq) and looking at a Dell computer screen (DELL on the New York Stock Exchange).

It is an endless list: I lease a Subaru (FUJHY on the over the counter market). Later on today I’ll pick up a package from Amazon (AMZN on Nasdaq). This evening I'll probably watch an episode of Jerry Seinfeld’s Comedian in Cars Getting Coffee on Netflix (NFLX on Nasdaq) while heating up leftovers using a General Electric Company (GE on the New York Stock Exchange) microwave. Even my electric toothbrush was manufactured by a publicly traded firm - Procter & Gamble (PG on the New York Stock Exchange).

Because many investors follow this principle of investing in products they use, the stock price of these companies is steep. Apple is trading at over 15 times the trailing earnings multiple, with a price to book value of 6 times. It is a somewhat high valuation, but it is minuscule compared to Netflix - its price to earnings multiple was over 100 times, with a price to book value of 27 times. Amazon is trading at 84 times the 2018 earnings and at 23 times the book value. These dear valuations would leave Benjamin Graham aghast.  

My work as a recycler

Frustrated by the lack of new stock investment ideas, I took out the trash. While sorting and dividing into recyclables and nonrecycles, I suddenly thought of the time I worked in Santa Ana, California, at a computer recycling company. It was about ten years ago and - for a minimum wage of $7.25 per hour - I stood on my feet for ten hours and tore apart old computers.

It was a lousy gig. By inhaling dust and gases, I reduced my life expectancy. Try to remove platinum chip from the CPU and you will see what I mean. I also had never before stood on my feet for such an extended amount of time, and to this day I empathize with cashiers at supermarkets. 

Thinking about that yearlong period of work as a recycler, I now realize how busy we were. The phone would constantly ring with local businesses inquiring about whether or not we could recycle their computer hardware (in California, the donation of old computers is a tax-deductible event). And there was no limit how much recycled parts we could sell in the market place.

I decided to call the owners of the business, two brothers who worked together. I asked them how their business was doing. “You wouldn’t recognize the place,” said Jacob, the older brother. “We now have over 200 employees; we increased our warehouse space by ten-fold, and we still cannot keep up with demand. We are even considering going public in 2019.” And that’s when I realized I needed to be back in the waste management business.

The lure of the waste management business

Three things are attractive about the waste management business. First, it is a growing industry with a growing need for companies to responsibly handle waste while meeting regulatory requirements. Second, in an economic down cycle, which we are likely to see in the coming years, the demand for recyclables will still be high in my opinion. Consider companies in medical waste, for example. The amount of waste they collect is unrelated to the business cycle.

Third, it is not a sexy business. I don’t imagine recent Ivy-league school graduates submitting their resumes to HR departments for middle management positions in waste management firms. I also don’t see young, famed-starved entrepreneurs pitching to angel investors how passionate they are about trash and its disposal. It is this lack of appeal that leads me to believe that no company will disrupt the waste management business any time soon.

So I researched a few publicly traded companies and quickly learned that I was not the only one in search of cheap waste management stocks. Appearantly they are in high demand and are trading at high valuations. Clean Harbors, that provides companies hazardous waste disposal, traded between $72 and $45 over the past year. It now trades at $60. Covanta Energy traded, during this time, between $18 and $13. It now trades for $16. Republic Services, which focuses in waste management for the energy sector, traded between $78 and $60. It now trades at $76. In short, all the waste management companies  were trading at the upper bound of the one-year valuation.

Stericycle

I did buy a few shares in Stericycle, a waste management company with $4 billion in market capitalization. While I was looking for waste management stocks, I accidentally found Diamond Hill Capital Management’s discussion about Stericycle and thought it was an appropriate buy. I will write more about  Stericycle in next week’s post.

Returning to my desk the morning after buying shares in Stericycle, I thought about the difference between principles and specific details. Principles stand the test time of time and guide us in the present. But they are often too general and universal so, specific details are the ones that really guide us.

In the Tanakh there are specific instructions as to how the principal of “love thy neighbor” is to be performed. “If you see your enemy’s ass sagging under its burden, you shall not pass by. You shall surely release it with him.” [Exodus 23:5]. It is a specific requirement following the general principle. Returning to stock investing, the principle I followed was to “invest in companies in which you are familiar with their product.” The specific detail was, “Look everywhere. Even in your trash.”