At CressCap Investment Research we provide directional recommendations based on our systematic valuation of over 6,000 stocks in markets across the globe. We always enjoy the chance to look at the portfolios of other smart investors to see what they are holding, and then compare their holdings to the stocks’ CressCap grades in our system. This week we took a look at Bill Gates’ portfolio and found that one of his favorites (as of 02/16/18) is Waste Management Inc. (WM), a CressCap buy recommendation. We presume he chose this stock for its high dividend yield, now 2.17%. However, upon closer examination, we found many more reasons this stock is attractive.
Waste Management is a multifaceted company which services over 21 million customers across North America. The company is the U.S.’s largest provider of waste management and residential recycling services. The company has also been working in recent years to capture the gas produced by landfills and turn it into an energy source to increase its sustainability. WM is a unique company that benefits when the economy is strong, as proved by 2017 being one of their best years ever, and is also relatively recession-proof since people will always generate garbage. This rare combination of strength and sustainability, along with 14 years of increased dividends, lends substance to Gates’ attraction to the stock.
Our recommendations are based on sector and regional relative academic letter grades on hundreds of financial metrics. The CressCap dividend grade of B+ stacks up well relative to the sector DY of 1.05%. We believe Waste Management’s CressCap growth grade of B- should continue to expand as the services sector is doing incredibly well as a whole.
Since the beginning of February, EPS estimates by analysts have been revised up for FY1 and FY2, providing for a grade of A+ and a strong indication of their conviction for future growth. The strong EPS revisions help to quell our concerns that the stock will be overvalued for a long period of time. It is true that Waste Management’s P/E ratio is poor relative to the sector, graded as a D+ by CressCap, however other valuation metrics such as EV/EBIT and CF/ROI with respective grades of B+ and A- have us convinced that there is still a good valuation story. Recent revenue strength is also indicative of the company’s momentum, as 2017 revenues were up 6.4% and adjusted diluted earnings growth was up 10%.
The profitability grades for Waste Management are also promising, with ROI and ROC both scoring A- grades, and an EBIT margin that is nearly double the sector (18.09 to a sector margin of 9.65).
It's always a good plan to look to a notable stock picker for some ideas. In this case, Bill Gates has entrusted Portfolio Manager Michael Larson to manage the Bill and Melinda Gates Foundation Trust. We use the CressCap platform to refine these ideas by examining their financial metrics, coming up with innovative and solid picks. In our opinion, the fusion of sound financial metrics and a strong service business lead us to understand the value this stock has to offer. Not to mention, the dividend yield growth over the past several years has been enough to convince a safe-better like Bill Gates that Waste Management should represent over 6% of his portfolio.
Written By: Steven Cress (steven.cress@cresscap.com) and Tela Wittig (tela.wittig@cresscap.com)
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