We recently compiled a list of the 10 Best Recycling Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where LKQ Corporation (NASDAQ:LKQ) stands against the other recycling stocks.

Imagine living in a society where all kinds of waste are converted into useful resources that power sectors like construction, energy packaging, and automotive while reducing landfill clutter. That’s the reality as calls for sustainability fuel recycling in the race to protect the environment and resources.

Consequently, the waste recycling services market is experiencing robust growth amid increased awareness of environmental sustainability, stringent waste disposal regulations and increased focus on resource conservation. With the recycling services market projected to be worth $78.43 billion by 2028 (as per The Business Research Company), there are tremendous opportunities to unlock by focusing on companies that are involved in the space.

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One of the key areas with tremendous potential in the recycling business involves plastic purification so that it can go back into the circular economy. Katherine Ogundiya, an analyst at Barclays, believes the crop of companies working on plastic recycling has been overlooked, yet they possess tremendous upside potential. “Advanced recycling has immense potential to transform the plastic waste crisis,” she said in a research note to investors.

The metal recycling market is growing significantly, primarily driven by the increasing demand for consumer electronics. Electronic waste is produced in tandem with the growth in the production and use of gadgets like smartphones, laptops, tablets, and home appliances. Essential metals that can be recovered and recycled, such as copper, aluminum, gold, and silver, are present in these devices. To preserve natural resources and lessen the environmental impact of mining and processing new metals, it is essential to recycle metals from e-waste.

The Environmental Protection Agency announced $2.6 billion in newly available funding for drinking water infrastructure through the Bipartisan Infrastructure Law to accompany that rule.

Based on data gathered in 2021, the Environmental Protection Agency projected in a report to Congress last year that the United States will require $625 billion in investments over two decades in drinking water infrastructure. The investment should also benefit companies engaged in the water recycling business by 2030.

The recycling sector is a prime example of how profit and the environment can coexist at a time when sustainability is a major topic of discussion worldwide. In addition to promoting a greener future as we move toward a more circular economy recycling companies offer access to a thriving market with substantial growth potential.

We’ll introduce you to some of the most notable waste management and recycling companies in this article. These businesses spearhead change and present astute investors with exciting prospects of long-term shareholder value.

Our Methodology

To compile the list of the best recycling stocks to buy according to hedge funds, we used a stock screener to find waste management and recycling companies. We then selected the stocks that were the most popular among elite hedge funds, as of Q2 2024. Finally, we ranked the stocks in ascending order based on the number of hedge funds that held stakes in them.

At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

LKQ Corporation (NASDAQ:LKQ)

Market cap as of November 7: $9.91 Billion

Number of Hedge Fund Holders: 31

LKQ Corporation (NASDAQ:LKQ) produces and recycles alternative and specialty parts of the auto industry. It distributes bumper covers, automotive body panels, lights, mechanical automotive parts, and accessories. While the stock is down by about 20% for the year, it remains one of the best recycling stocks to buy, going by the impressive financial results.

Its revenue in the third quarter, as reported on October 24, 2024, was up 0.5% year over year to $3.6 billion. Adjusted net income in the quarter totalled $230 million compared to $231 million in the same quarter last year. The company exited the quarter with $661 million in free cash flow, returning $200 million to shareholders by investing $125 million in stock repurchases and $79 million in cash dividends.

LKQ Corporation (NASDAQ:LKQ) also announced a strategic divestment of its subsidiary Elit Polska. This action aligns with the business’s plan to simplify its asset base. Additionally, LKQ and the German trade union Verdi have successfully reached a collective bargaining agreement to benefit approximately 5,000 of LKQ’s German workers.

While trading at a discount with a price-to-earnings multiple of 10, LKQ Corporation (NASDAQ:LKQ) is one of the best recycling stocks, as it has a 3.25% dividend yield, which is ideal for generating passive income. Additionally, the board has authorized a $1 billion increase in the stock repurchase program, raising the aggregate authorization to $4.5 billion which should allow it to return more value.

Artisan Partners’ Artisan Mid Cap Value Fund stated the following regarding LKQ Corporation (NASDAQ:LKQ) in its Q2 2024 investor letter:

“In the health care and consumer discretionary sectors, Baxter International and LKQ Corporation (NASDAQ:LKQ) were key detractors. LKQ is the dominant player in salvage/aftermarket collision parts distribution in North America, with over 70% market share. In addition to continued cost inflation, lower-than-expected collision claims in North America due partly to a mild winter resulted in disappointing quarterly earnings. What was already a cheap stock when we initiated our position in January of this year has become even cheaper. At a 10X P/E, shares trade at a distinct discount to their historical 10-year average of 14X and are also cheaper relative to LKQ’s auto parts retailer peers, which arguably have similar long-term growth profiles. LKQ isn’t a fast-growing business, but it can grow 2% to 4%, and given its dominant market share and mid-teens return on tangible capital, we believe it should trade at a higher valuation. Over the last decade, LKQ has also become the largest mechanical parts distributor in Europe. As is the case in North America, independent European mechanics value LKQ’s reliable distribution and competitive pricing. The European business has improved operationally over the last five years as LKQ has focused on the integration of its various acquisitions to drive margin and free cash flow improvements. LKQ operates in end markets with limited cyclicality as 90% of revenues are tied to non-discretionary spending and reliably has strong free cash flow generation. The company also meets our requirement for a sound financial condition as its debt load is manageable at 2X EBITDA due to its attractive free cash flow. We added to our position on weakness.”

Overall LKQ ranks 6th on our list of the best recycling stocks to buy according to hedge funds. While we acknowledge the potential of LKQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LKQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.