Getting Dirty with Peter Lynch
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In my tireless quest for self-education in investing, I am reading all the investment "classics" I can get my hands on. I started with Benjamin Graham's The Intelligent Investor, but made a mistake when I then tried to move on to another work of his, Security Analysis. When I reached the chapter titled "Misleading Artifices in the Income Account. Earnings of Subsidiaries", I gave up. I grabbed One Up On Wall Street by Peter Lynch, famed manager of the Fidelity Magellan Fund, and thoroughly enjoyed it. One fascinating chapter details thirteen qualities Mr. Lynch looks for in the "perfect company". Here are a few.
#1. It Sounds Dull
#2. It Does Something Dull
#3. It Does Something Disagreeable
#10. People Have to Keep Buying It
A good place to find a company that fits this bill is in the waste management industry. They typically don't have sexy names; there are few activities more dull or disagreeable than collecting and disposing of waste; they lack the growth trends of tech companies; and you can probably add waste generation to the short list of the sure things in life, right alongside death and taxes. I performed a very sophisticated stock screen (searched the waste management industry for a dull sounding company) and discovered Clean Harbors Inc. (NYSE: CLH).
Clean Harbors is a company that performs a myriad of dull and disagreeable services. Some business functions include hazardous material disposal, environmental cleanup services, explosives disposal, medical waste disposal, wastewater treatment, oilfield fluid handling/disposal, and industrial chemical cleaning. It is headed by a founder-CEO with loads of skin in the game (9.1% ownership!) and an executive management team with an average tenure of 14 years. Their customer base includes a majority of Fortune 500 companies and the U.S. Government. Revenues and EPS have increased at an annual rate of 20% over the last four years while net margin has increased by 170 basis points. They have a 15% return on equity, which is very respectable compared with their industry.
There's Growth in Dull
There is significant growth potential in the Oil and Gas Field Services business segment, which supports exploration, drilling, and production for oil and gas companies. In 2009, this segment accounted for 7.2% of sales and 2.6% of EBITDA and has grown to make up 19.8% of sales and 24.4% of EBITDA in 2011. The boom in natural gas drilling and the advancement of oil sands development are the driving forces behind this trend. The future of natural gas regulation is unclear, but I'd be willing to bet it will include stricter rules on the treatment and disposal of hydraulic fracturing water. Clean Harbors is poised to be a major player in this industry.
I must spend some time on the competitive landscape. In each region they operate, there are hundreds of local and regional private competitors. There are also big name competitors, notably Waste Management Inc. (NYSE: WM) and Veolia Environmental (NYSE: VE). Veolia appears to be on a decline, falling into unprofitability in 2011, although the 6% yield grabbed my attention. Waste Management is a wonderfully run company that also yields a nice 4%. My argument in favor of Clean Harbors is they are more diversified in higher growth potential industries and therefore have more of a runway ahead of them. This is reflected in their heftier P/E of 23.5 compared to 16 for Waste Management.
Meeting all of Peter Lynch's thirteen traits does not make a stock "perfect", and even if you believed so, Clean Harbors is far from fitting the bill. However, what I enjoy most about the approach is how devoid it is of metrics. When evaluating a company it is easy to lose yourself in a rabbit hole of data and numbers, sometimes to the point where you don't even remember what the fundamental business is. I find it useful to take a step back and think subjectively about a company. Does it have a niche? Do people have to keep using its product or service? Is its growth sustainable? Who is management? Answering these questions may provide more insight in your search for the "perfect company".
drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Clean Harbors and Waste Management. Motley Fool newsletter services recommend Veolia Environnement (ADR) and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.