Investing in Small-Cap Garbage

01/01/2016 9:00 am EST


Matt McCall

Founder and President, Penn Financial Group

On one side of the consumer staples sector are bare necessities such as soap, food, etc. but on the other end of the spectrum is garbage, so Matt McCall, of Penn Financial Group, highlights several recent big winners in the field of waste management and disposal.

One strategy for investing is to invest in a business model that will always be in demand regardless of how good or bad the economy may be. The first sectors are typically consumer staples such as diapers, soap, food, etc. However, on the other end of the cycle is the garbage that is created by all the things that people discard on a daily basis.

The big players in the sector have rewarded investors over the past year with gains well above that of the overall market. The largest company in the sector, Waste Management (WM) is up 6% with Republic Services (RSG) up over 12% in 2015. Compared to the S&P 500 (SPX) that is flat, the returns are impressive.

Investors looking for small-cap ideas in the sector do not have a large pool to choose from, however there are a few names that are flying under Wall Street’s radar.

Casella Waste Systems (CWST) is a regional, vertically-integrated solid waste and resource management services company that serves the northeastern portion of the US. The stock has struggled for many years until recently and is a big winner over the last 12 months as it is up 50%. A recent pullback to a support area at $6 is offering what appears to be another buying opportunity.

Fundamentally, the $247 million company is projected to turn profitable next year and grow earnings per share up to 35 cents by 2019. As revenue and margins also continue to improve, it could be the catalyst for higher prices in the coming months for the stock.

Sharps Compliance Corp (SMED) is not a typical waste management company; it concentrates on medical waste and used healthcare materials. Customers range from hospitals to home healthcare to pharmaceutical manufacturers. The stock has more than doubled in the last year, but still has room to move to retest the all time of $13.00 set in 2009.

Earnings next year are expected to increase by 180% to 20 cents per share from 7 cents in 2015. By 2017 earnings should reach 34 cents according to the four analysts that cover the stock.

The two stocks are in the same industry, yet they are in different niche areas. But one thing remains certain, someone has to dispose of the various types of waste around the country.

Matt McCall, Founder and President, Penn Financial Group

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