NEW YORK - JULY 31: New York Mayor, Michael R...The S&P 500 is down, U.S. companies are frozen in fear, and the general investor feels like there is nowhere to hide right now.  Paradoxes abound:  Even though U.S. Treasuries have been downgraded, investors rushed to buy them anyway, in a mad dash to quality.

Companies have announced value-enhancing actions like splitting in two, raising dividends, converting to REITS, or buying back stock.  It still doesn’t move the needle, though.  These days the stock market seems to be telling us that all public companies are lousy investments no matter how well they are run financially.

So what is an investor to do?

I decided to pick two very different stocks that have one thing in common:  horrible year-to-date returns.  One of these stocks deserves its -20% return.  The other has a disappointing -15% return but really deserves better.  Let’s look at them in detail to see what this tells us about the market right now, and how we might still be able to make some money during these chaotic times.

Casella Waste Systems (CWST, $ 5.65 )

This small-cap company makes its money hauling waste for residential, commercial, municipal, and industrial customers in the Northeastern United States.  CWST also is involved in recycling.  Last year about 40% of revenues were from collection services, 21% from transfer/disposal activities, and 28% from recycling services.  From a sector viewpoint, you would think the industry would be a good defensive pick right now.  After all, we still continue to generate trash, haul it away, and recycle.

But Casella Waste’s financial condition plays a crucial role in predicting how much stress a company can stand during a weak economic cycle.  CWST’s market capitalization is only $ 148 million, making its debt load of $ 469 million seem enormous.  A simple spreadsheet model of the company’s financials will scare you.  Casella’s leverage is alarmingly high at 5.4 times (i.e. its total debt to trailing twelve month EBITDA ratio is 5.4), and interest coverage is only 1.8 times (i.e. EBITDA barely covers the interest expense associated with the company’s debt).  Try getting a mortgage today with those credit stats.  I guarantee you can’t.

In better times, Casella would probably be doing ok.  Top line revenues would lumber along, prices would rise, and gradually the company would even make good on its pledge to pay down some of that high debt load.  But not now.  Stagnant growth in the company’s Northeast business area has prevented any balance sheet improvement.  Rising operating costs don’t help either.

Hurricane Irene’s devastating impact on Casella’s key Vermont market has forced Casella to spend more money on alternate routes, due to infrastructure damage of major roads that won’t be repaired for months.  This strains liquidity, so things could hardly get much worse for the company.

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Yahoo! Finance: Waste Management Industry News

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