By Jack Hough

Garbage stocks are hot, or not, depending on our usage of the term. If we mean low-quality meme-type names, those are having another moment. Unprofitable U.S. companies of all sizes returned an average of 36% through the first half of this year, much more than profitable companies, according to Bespoke Investment Group.

If by "garbage stocks" we're referring literally to the business of carting off waste, those have hit a teensy soft patch, falling by mid-single-digit percentages over the past two months, versus a 6% gain for the S&P 500 index. One reason is that prices have dipped for some of the recycled products that these companies deal in, like bales of old corrugated boxes, as well as for renewable fuel credits. More on those in a moment. Another is that the garbage business is defensive, and the mood of the moment among investors favors risk.

This isn't to say that the garbage business is trading cheaply. If you're holding out for that, good luck. Investors prize these companies for their reliable cash flows, which have led to sneakily high long-term returns. Ten-year holders of industry leaders Waste Management and Republic Services have made 462% and 602%, respectively, versus 253% for the S&P 500.

William Blair analyst Trevor Romeo reckons that recent stock weakness offers an opportunity to buy the garbage group at an 8% premium to the market, versus a more typical 15% to 20%, based on enterprise values relative to earnings before interest, taxes, depreciation, and amortization, or Ebitda.

If those numbers aren't alluring enough, here are some others: Of the 1,265 landfills tracked in an Environmental Protection Agency methane database, 594 are projected to close by 2050. Landfill openings were plentiful in the 1970s and '80s but have become scarce in recent years. Closings will begin spiking over the next five years. A shortage of landfill capacity may grow dire enough to alter these numbers; some landfill owners will expand rather than close. Even so, landfill owners with spare capacity -- mostly a handful of vertically integrated giants -- will be able to name their price.

"It used to be, you know, every county or municipality would have their own little landfill dump, and they would operate it," says Romeo. "It's the large public companies that we cover that own the majority of the landfills, or at least the landfill volumes, in the U.S. now."

The U.S. produces about five pounds of municipal solid waste per person a day, according to the EPA. That's standard trash, not counting hazardous and weird stuff. Output in recent years has grown slowly, tracking the population increase. Homeowners and business owners pay fees directly or indirectly for hauling trash away. Haulers then pay tipping fees to transfer stations, which pay more fees to send the trash on to either landfills or materials-recovery facilities.

Yes, recycling is a real thing that actually happens. "It's funny how often we get that question," says Romeo. Modern sorting facilities have few people and rely on robots, advanced optics, and artificial intelligence. "With some of the newer facilities, especially on a free-cash-flow margin basis, I think you're actually higher on recycling now than you are on the landfill business," says Romeo.

Landfills produce methane, and for the companies that capture it, there is more money to be made by selling it to pipelines or even using it to power their trucks. Plus, renewable-fuel producers generate credits, called renewable identification numbers, or RINs, which can be sold separately from the fuel.

Costs are substantial and rising. The average waste industry worker costs around $100,000 a year in pay and benefits. Vehicles cost $80,000 a year to maintain. Trash is being deposited farther from where it is generated, especially in the Northeast, where landfill capacity is tightest. New York, for example, sends trash by rail to Ohio and Alabama. That adds transport costs. All of this favors scale and deep financial resources.

Houston-based Waste Management, at 28% of U.S. landfill volume managed, is slightly larger than all municipal players combined. It is able to out-invest rivals on advanced recycling centers and renewable natural-gas projects. And a recent acquisition of Stericycle makes it the biggest player in medical waste at a time when an aging population is using more healthcare and a rising number of patients are administering injections at home. Shares trade at 25 times next year's free-cash-flow consensus.

Republic Services, out of Phoenix, has a 20% share, a big position in hazardous-waste disposal, and a lead on something called bottle circularity. Plastic waste is often turned into products that aren't typically recycled further, like carpeting. But with sophisticated sorting, bottles can be chopped instead into a product called rPET flake, or recycled polyethylene terephthalate pieces, which can then be economically turned into new bottles, which can later be recycled again. Demand for rPET flake is growing quickly. Republic trades at 29 times next year's free cash flow.

Two Canadian companies, Waste Connections and GFL Environmental, rank third and fourth in U.S. market share. Waste Connections has made a side specialty of handling the drilling fluids and other waste produced by oil-and-gas companies.

Romeo at William Blair is bullish on Waste Management, Republic, and Waste Connections; he doesn't cover GFL. His favorite stock in the group is a smaller player based in Rutland, Vt., called Casella Waste Systems. Unlike the larger players, Casella only operates in 10 states in the Northeast, where landfill capacity is dearest. Its smaller size allows it to profit more from rolling up mom-and-pop trash collectors that aren't passing their businesses on to their kids. Casella trades at 40 times next year's free cash flow, but it's easily the fastest grower of the bunch. Wall Street sees its free cash flow doubling by the end of the decade.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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July 18, 2025 12:13 ET (16:13 GMT)

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