To be clear, that headline doesn’t imply junk stocks or those with dubious traits, but rather shares of waste management companies. Indeed, that’s an overlooked segment of the market, but one with opportunity for value investors and those looking for leverage to sustainability.
Enter the VanEck Environmental Services ETF (EVX). EVX debuted in October 2016 and follows the NYSE Arca Environmental Services Index. It’s also one of a small number of exchange traded funds with ample exposure to the major publicly traded trash hauling companies.
While this business model isn’t sexy and the industry is overlooked, Waste Connections (NYSE: WCN), Republic Services (NYSE: RSG), and Waste Management (NYSE: WM) have a combined market value of approximately $130 billion and none fit the bill as small-cap companies. They are also at the right place at the right time and not just because trash removal and proper treatment of refuse are essential. Those three stocks combine for over 28% of the EVX portfolio.
“They also possess monopoly-like qualities and ample pricing power to keep up with inflation. And with their underperformance, Waste Management, Republic Services, and Waste Connections are now as attractive from a valuation standpoint as they have been in years,” reported Nicholas Jasinski for Barron’s.
EVX has other perks. Consider the ETF’s combined weight of more than 6% to GFL Environmental (NYSE: GFL) and Cassella Waste Systems (NASDAQ: CWST). They’re among the dominant names in residential waste removal – an industry where there aren’t many competitors.
Small competitive landscapes afford established participants pricing power – an appealing trait for investors in inflationary environments, such as the current one.
“Those dynamics give the industry pricing power, which came in handy in 2022 as inflation heated up. Overall rate increases in the high-single-digit percentage range were enough to keep up with increasing costs — chiefly labor — and little else. In 2023, the industry’s price increases could be slimmer than last year’s, but more of that will flow through to companies’ bottom line,” according to Barron’s.
Interestingly, some of the aforementioned EVX member firms have inroads into renewable energy – a fact that many investors may not be aware of and as such, may not yet be fully priced into the shares.
“Waste companies have also started capturing the methane emissions from decomposing material at landfills and converting it into renewable natural gas used to generate electricity or power garbage trucks. Every gallon produced also yields a renewable identification number, or RIN — an Environmental Protection Agency –regulated credit that can be sold by solid-waste companies to others interested in offsetting their fossil-fuel usage or meeting regulatory quotas,” concluded the Barron’s article.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
