3 Stocks That Can Really Clean up
04/25/2012 10:45 am EST
Economic expansion in the US and globally means more output and more waste, and these three waste management stocks look to be clear beneficiaries of this long-term trend.
Better-than-expected iPhone sales put a shine back on the stock market, and Apple, Inc. (AAPL) rose almost 10% in afterhours trading. With AAPL back over $600 per share, the question now is how many of those who bought the stock at $630-$640 will stay with their long positions? The drop from $644 to the recent low of $555 may have been too much for many investors to handle.
The market internals will improve with a strong close Wednesday, but the negative divergence I discussed on April 9 has not yet been resolved, so it is too early to say that the stock market’s correction is over.
Though many in the financial media will be debating the outlook for Apple’s overseas sales, there is one commodity whose strong long-term outlook can’t be disputed. Unfortunately, I am referring to waste, as some experts expect global waste production to double between 2005 and 2025.
The data shows a clear correlation between increased GDP in the emerging markets and a higher level of waste production. These three waste management companies came up on my scans last weekend, and both Waste Management Inc. (WM) and Stericyle Inc. (SRCL) have earnings reports due out this week.
Chart Analysis: Waste Management Inc. (WM) is probably the best-known name in the industry, as it is a $16 billion company that provides a wide range of waste management services throughout the US. The company is scheduled to report earnings at 10 am ET on Thursday, April 26.
- The daily chart shows that WM closed convincingly above the resistance at $35.56-$35.76 last week
- This corresponds to last October’s highs, and a monthly chart close above this resistance should have intermediate-term significance
- The resistance from 2011 is at $38, and in 2007, WM had a high of $41.19
- Daily relative performance, or RS analysis, has been improving since late March but is still below resistance at line d
- Weekly RS analysis (not shown) has also not yet completed a bottom
- Daily on-balance volume (OBV) did break through its downtrend in early April and is well above its rising weighted moving average (WMA). The weekly OBV is above its weighted moving average
- There is good additional support in the $34.60-$35 area
Stericycle Inc. (SRCL) is a $7.4 billion waste management company that focuses on medical waste both in the US and globally. SRCL has resistance in the $90.80 area (line a) from the fall of 2011. Company earnings are scheduled for release after the close on Wednesday.
- SRCL had an all-time high in 2011 of $93.77
- The daily RS line has broken its downtrend, line i, suggesting that it has recently been outperforming the S&P 500. A move above the early-2012 highs is needed to confirm a bottom
- Daily OBV is in a short-term uptrend with key resistance at line k. The OBV has support at its weighted moving average and the uptrend, line k
- Weekly OBV (not shown) is above its weighted moving average
- There is first support in the $84.50-$86 area with monthly support in the $81.80 area, line h
Covanta Holding Corp. (CVA) is a $2.1 billion company that provides municipal waste management services in the US, as well as Europe, Asia, and Latin America. It also operates large-scale waste-to-energy facilities, and the stock currently yields 3.8%.
- The weekly chart shows that in April, CVA approached the 38.2% retracement support in the $15.35 area. Last fall’s highs in the $15 area provide further support
- Weekly relative performance is holding above its flat weighted moving average and is testing its downtrend. A move above the February highs is needed to complete a major bottom
- Weekly OBV is acting much stronger, as it formed a bullish divergence at the December lows, line d. This was confirmed when the OBV moved through its downtrend, line c, in February
- Next resistance is at $16.20-$16.40 and then at $16.85
What It Means: In analyzing over 20 years of data, the seasonal trend is for Waste Management Inc. (WM) to bottom in late February and rally through the end of June. The weekly analysis of both Waste Management Inc. (WM) and Stericycle Inc. (SRCL) is not strong enough, in my opinion, to take a position ahead of their earnings reports.
Even though the overall stock market can still correct further, Covanta Holding Corp. (CVA) does look more attractive, as the volume analysis suggests that an important low was completed in December.
How to Profit: For Covanta Holding Corp. (CVA), go 50% long at $15.82 and 50% long at $15.56 with a stop at $14.84 (risk of approx. 5.4%).