Garbage in, Garbage out—Except the Yield

11/01/2010 11:11 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, likes a savvy mortgage investor and the nation’s leading waste hauler—but they don’t have much in common except good dividends.

The economy continues to send mixed signals, just as the market has.

Time will tell whether this represents inventory rebuilding or genuine end-market sales, but outbound shipping traffic suggests at least some of it is real export demand: Exports at Long Beach were up 13.4% in September over the same month last year.

On the negative side of the ledger, Macroeconomic Advisers revised lower its [third-quarter gross domestic product growth] forecast to 1.2%. That’s barely a pulse. The Baltic Dry Index, which tracks the price of dry bulk shipping, like ore and grains, is still scraping along at multi-year lows.

There are minor improvements, but not nearly enough to justify the recent glowing assessments we hear from Wall Street and the financial media. Nonetheless, this looks like a playable rally for now; so we’ll add a few positions, but we will not drink the Kool-Aid.

Chimera Investment (NYSE:CIM) is a subsidiary of Annaly Mortgage Management (NYSE: NLY). Its holdings include residential mortgage loans; asset-backed securities; prime, jumbo prime, and Alt-A mortgage loans (mortgages to borrowers between prime and subprime—Editor), [and] debt and equity tranches of [credit default obligations]. Like Annaly, it is a [real estate investment trust] and its income is not taxed at the corporate level.

The assets Chimera holds are riskier than Annaly’s. But years of following the company give me every confidence that it is choosing its investments wisely.

The yield on this stock is very high. It looks like a junk bond from the wild days of [leveraged buyouts]; last year, dividends alone returned 17%. I cannot promise you the dividend will remain that high, but I do think that over a full interest-rate cycle, the yield will exceed 10%, and more likely, 12%.

Most analysts would call any stock with this high a yield speculative. I won’t. I think this investment is safer than most of what’s out there, given how quickly it returns cash to you. Buy Chimera up to $4.50. (It closed above $4.00 Friday—Editor.)

Waste Management (NYSE: WM) is the largest provider of solid waste disposal in the US. It also has a growing recyclable and waste-to-energy business. The two biggest players, itself and Republic Group, have been consolidating the industry. There will eventually be only three or four players. This is good or bad for pricing, depending on whether you’re trying to get your garbage picked up or trying to make money on the stock.

While [a 3.4% yield] isn’t huge, it’s a lot better than what you can get anywhere in the bond market or in 99% of the Standard & Poor’s 500, and the company has grown its dividend an average of 9% per year over the last six years.

The big three waste firms have decent pricing power. They work on long-term contracts and tend not to step on each others’ toes too much. Waste Management should continue to be a reliable source of total return. Buy Waste Management up to $39. (It closed Friday below $36—Editor.)

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