Why I bought and hedged Republic Services Inc. (RSG) and may buy Waste Management (WM)

The waste management industry looks like a pretty good speculation for long-term dividend speculators. Today, I bought some Repubiic Services Inc. and sold covered calls on the stock, as explained below. I may buy some Waste Management (WM) too to complete my investment in the industry.

A post on Facebook by Crista Huff who blogs at The Right Huff got me interested in the stock, and I did some research on it, which I described on her FB thread. Since FB has made linking to threads clunky, I'm pasting my comments on Christa's thread below. This also will allow me to review my thinking about RSG and WM later.

Christa, RSG has a point and figure price objective (not target and not a prediction, but an indication of potential) of $55 with the stock at $29.83. The breakout price is $33. That is, if the stock hits $33, it's a buy. Right now it's in a minor correction. The weekly SAR and MACD indicators are negative. The dailies are buys on increased volume. RSI also is looking more bullish.

Morningstar gives RSG 4 stars out of a potential 5. It estimates the stock' fair value is $38, up about 27% from where it is now. So I'd call this a swing trade, not a short trade. Let your profits run, cut losses at 3% to 5% in this volatile market.

What concerns me is that BSG has fixed contracts with its customers while its fuel costs are soaring. I don't know if it's hedged. RSG also in the midst of an acquisition that saddles it with more debt, which isn't good when interest rates are poised to rise.

On balance, not a bad call.

SeekingAlpha.com has a great overview of the waste management industry and suggests 7 stocks. Waste Management pays a 3.4% dividend, and its profits go up every year. The article also says RSG is a good play for speculators looking for steady but small gains every year.http://tiny.cc/05pz6 .

Click on one of these charts for waste mgmt. stocks to see what the market thinks of them at the moment.

Buyers of RSG Oct. 30 calls are betting the stock will hit $31.50 by mid Oct. Buyers of Oct 30 puts are betting the stock will be about $28, based on bid prices.

Option trading in all of these stocks is thin.

Thin trading, low open interest, low premiums on RSG calls and a low implied volatility on the Oct. 30 calls of 20.9% indicates but doesn't promise that the stock is not very risky and won't move much anytime soon, I think. So you could buy RSG or WM for the dividends and some appreciation, but I don't see it as very attractive for short or intermediate term speculators. We're all speculators, btw.

WM has made a nice gain since this piece ran on SeekingAlpha.com. I like the stock's momentum, but RSG looks pretty good, too. Note that the Bill Gates Foundation owns 15% of RSG and 4% of WM. I'm not a big follower of gurus because their investment objectives are different from mine, but it's interesting info.

This gives me pause on WM. Morningstar (M*) says that WM's estimated fair value is $37 with the stock trading at $37.21. M* says consider buying WM at $25.90 and consider selling at $51.80. So with its current momentum, WM still offers potential gains, according to M*. Obviously, these stocks move with the market, which is looking mildly bullish near term but toppy by summer, imho.

M* gives WM 3 stars, which means it thinks the stock is fully priced, but the charts look more bullish to me.

I bought a few RSG at $29.93 and sold RSG 30 April calls at 30 cents. The options expire in 18 days. If the stock is below $30 when the option expires, my annualized return including the 20 cent dividend for the 18 days will be a bit over 33% after commissions. If the stock closes over 30 and is called, my annualized return will be 25% for the 18 days. If the stock drops more than 50 cents by expiration, I lose, and that's very possible. Selling covered calls can be lucrative, but it's very risky. If I hold the stock long term with a 2.68% dividend and, say a 5% annual growth rate, I get a 7.68% tax free return in my IRA account. On a tax equivalent basis, that's equal to a 10.74% rate for the 25% bracket and 11.18% for the 35% bracket.

Anything over 11% tax equivalent is Madoff money.

All of this is for educational purposes only. I don't make recommendations on how speculators trade equities, bonds or futures contracts and take no responsibility for what they do in the markets. Investigate before you speculate, please!

Posted by Donald E. L. Johnson on 03/28/2011 at 11:30 AM

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