No Haste to Buy Waste Management

05/01/2007 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman and CEO of Schaeffer’s Investment Research, sees a favorable magazine story on Waste Management as a contrarian signal to be cautious on the nation’s largest waste hauler.

An article in the April 23rd issue of Barron’s magazine (“For Waste Management, Trash Is Cash”) details the troubled days and subsequent rise of Waste Management (NYSE: WMI), North America's largest waste-hauler.

Noting that the company was once "as sullied as the garbage it collected," the article details the turnaround at WMI due to new management and an aggressive pricing strategy that have lifted the bottom line: The article notes that Waste Management predicts an increase of 8% to 10% in earnings per share to $1.96 to $2.00 per share.

Looking forward, the article notes that "Beating 2007 guidance should be no sweat for the 20-year-old company if the economy perks up in the second half."

The author then states that merely matching the consensus estimate could "help send the stock into the mid-40s." (It closed Monday at around $37.50—Editor.) The article [concludes]: "Ultimately, a bet on Waste Management depends on the major trash haulers holding the line on pricing, even if the economy slips."

Admittedly, the firm’s [earnings have] been strong during the past several reporting periods. According to Zacks, the company has bested expectations by an average of nearly 9% during the prior four earnings releases.

[The stock rallied 8% after Friday after WMI reported first-quarter earnings of 42 cents a share, beating Wall Street consensus estimates of 36 cents.]

We acknowledge the importance of fundamental analysis, but there are two more sides to the story that are not addressed in the article: technical performance and sentiment analysis. Both of these factors draw WMI's short- to intermediate-term performance into question.

First, investors are just as bullishly oriented as this article. The stock's Schaeffer's put/call open interest ratio (SOIR) ranks below 64% of those taken during the past year, indicating the optimism among speculative options players.

Meanwhile, short sellers have abandoned WMI, leaving less than 1% of the stock's total float sold short and all but negating any potential short-covering rally. Not to mention Wall Street, where all six analysts following the shares rate them "Buy" or better, providing ample room for downgrades.

Technically, WMI is reeling from being rejected at a double-top in the 39 region. This pullback had the shares trading below key support in the region and their ten-week moving average [before Friday’s rally].

What's more, the equity is in danger of slipping back below long-term resistance at the 35 level. The 35 strike is also home to peak call open interest among near-term options, creating a "double jeopardy" situation for WMI, should the shares breach this key level.

While the fundamentals look pretty decent, it could be a while before the shares actually catch up. A weakening technical outlook and bullish sentiment combine to make WMI a weak bullish selection over the short to intermediate term.

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