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Is Waste Management, Inc. (WM) A Good Stock to Buy?

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Waste Management, Inc. (NYSE:WM), an $18 billion market cap waste management services company, has risen 16% year to date- narrowly outperforming the S&P 500 despite the fact that the stock carries a beta of 0.7 and so would be expected to underperform during a bull market. The company’s revenues increased only 2% last year compared to 2011, and with operating costs increasing at a faster rate Waste Management, Inc. (NYSE:WM) experienced a 15% decrease in net income. Cash flow from operations was also down slightly. The fourth quarter of the year was in line with the general trend for 2012, as sales showed very little increase from their levels a year ago while net income declined at a double-digit rate.

However, investors have been bidding up the stock price (as we discussed earlier) and currently Waste Management, Inc. (NYSE:WM) trades at 22 times trailing earnings. The sell-side does expect some bottom-line growth over the next couple years, but still the forward P/E is 17 which seems rather high for a stable, almost utility like business. So from a value perspective the stock seems, if anything, overvalued. Waste Management does pay a generous dividend yield of 3.8% at current prices, making it a strong contender for an income portfolio; with the fairly low beta as well it could also make for a good defensive stock.

Waste Management logoWe track 13F filings from hedge funds and other notable investors as part of our work researching investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can also use our database to see who liked Waste Management, Inc. (NYSE:WM) as of the end of December. The largest shareholder out of the filers we track was the Bill and Melinda Gates Foundation Trust, which owned nearly 19 million shares; the trust owns a significant percentage stake of fellow waste management services company Republic Services, Inc. (NYSE:RSG). See more of the trust’s stock picks. Value investor Barry Rosenstein’s JANA Partners initiated a position of 1.3 million shares in the fourth quarter of 2012 (find JANA’s favorite stocks).

Waste Management’s peers, other than Republic Services, include Waste Connections, Inc. (NYSE:WCN), Progressive Waste Solutions Ltd (USA) (NYSE:BIN), and Covanta Holding Corporation (NYSE:CVA). The two highest dividend yields belong to Republic Services and Covanta, though each pays a lower yield than Waste Management does. Republic pays 2.9% to its shareholders, and its stock price also has a weak statistical relationship to the market with a beta of 0.6.

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