August 12, 2012 in Business

Motley Fool: Dive Into This Dumpster

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Associated Press photo

Waste Management workers pick up trash in a Spring, Texas, neighborhood.
(Full-size photo)

Waste Management (NYSE: WM) isn’t just the industry leader in dumping garbage. It’s also the nation’s largest recycler, an innovator in generating renewable energy, and the owner of 271 landfills and 107 recycling facilities as of the end of 2011. The stock took a hit recently on disappointing earnings due to higher gas prices and lower commodity costs. It’s still a great potential investment for your portfolio, though.

The average American produces 1,600 pounds of trash each year. Thus, Waste Management deals in non-optional necessities and is a defensive stock. In 2008, when most stocks plunged, it rose. Its industry is very capital-intensive, so competitors can’t just materialize easily.

Waste Management is the industry leader with a $15 billion market cap, bigger than that of both its largest competitors combined. Size matters in this industry, and Waste Management has the definite advantage.

It’s innovative, too. For example, it has been exploring methods of converting methane gas into electricity to power its trucks and many homes. This could end up providing the industry with an entirely new source of revenue. Some worry, though, about Waste Management’s exposure to underfunded pensions and its focus on growing via acquisitions.

Waste Management’s dividend recently yielded 4.3 percent. Learn more about the company and see if you’d like to dump it into your portfolio.

Ask the Fool

Q: How can I determine a stock’s fair value? – C.B., Nashua, N.H.

A: A company’s fair, or true, value is not easy to determine. Smart analysts will perform complex calculations – and still disagree. They often use a “discounted cash flow” analysis, which involves (take a deep breath) projecting future free cash flows and assigning them present values based on a chosen discount rate, which is often the weighted-average cost of capital. (You were warned!) Despite all this, their results are still estimates, based on educated guesses.

There are simpler approaches to valuation. One very rough method is comparing a firm’s price-to-earnings (P/E) ratio to its growth rate. If the growth rate is much higher, the stock may be undervalued.

Another easy approach is just to check out the company’s historical P/E ratio range, which you can find at sites such as morningstar.com, money.msn.com and caps.fool.com. If the stock’s P/E has usually been between 15 and 20 and it’s 25 now, there’s a good chance it’s overvalued.

Remember, too, that P/E ratios tend to vary by industry. Automakers, for example, typically have low ones, while less-capital-intensive businesses such as software firms often have higher P/Es.

Don’t rely on any of these methods alone, though. Always gather plenty of information and look at many factors. To learn which companies our analysts think are undervalued, try our Motley Fool Inside Value newsletter for free, at insidevalue.fool.com.

My dumbest investment

My dumbest investment was putting money in cows – cattle – which I did twice, losing both times. First, I purchased three “exotic” heifers. The demand for this particular breed went down fast, and one of my animals turned out to be incapable of producing calves, which was the whole point in the first place. The second time – well, it’s too painful to talk about. My rule ever since: Don’t invest in anything that eats! – B.R., Calgary, Alberta

The Fool responds: Well, you might invest in your children. But otherwise, be careful. It’s easy to see someone make a bundle on some unusual kind of investment and then to try to do the same. But you’re at a disadvantage if you don’t have a solid understanding of the cattle business – or art, or real estate, for that matter. To succeed as a landlord, in addition to market savvy, you need certain skills, or you’ll have to pay to hire them.


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