Hey there.
As I’ve mentioned a few times over the last few newsletters, I’m struggling to find a lot of “slam-dunk” Bull List additions in this market environment. We’re fairly frothy right now in terms of overall valuations, market sentiment, and forward outlooks.
I’m still digging, and will continue to dig. Some of the feedback I am getting at this point is along the lines of:
“What do you mean, there are no stocks to highlight? The markets keep going up!”
And to that, again, I mention the fact that I am not interested in identifying stocks that will provide outsized returns over the next 3 months, 6 months, or one year. I’m looking for long-term winners. Stocks I can buy today and reap the benefits in 5 years, 10 years, 15 years, etc.
So in this week’s newsletter, I’m going to stay internal, highlighting a company that I will eventually be taking a position in, but am patiently waiting out the markets in terms of rotation.
What I mean by rotation is money rotating out of defensive options and into high-growth options. As growth options get more expensive and defensive options get cheaper, this presents an opportunity, in my opinion and one I will be taking advantage of eventually.
This email will go well with last week’s email, as I discussed the idea of adding more to defensive holdings at higher valuations.
First, lets quickly dive into my portfolio moves on the week
I made three notable moves this week. The first few were additions to Constellation Software (TSE:CSU) and Topicus (TSEV:TOI).
Both of these companies are going through large drawdowns due to fears of artificial intelligence impacting their business models. When we think of both of these companies as vertical market software companies, meaning they acquire subscription service companies that sell software to niche industries, we can begin to understand how AI might have an impact.
Coding has become exceptionally easier with the evolution of ChatGPT and other LLMs. As a result, there are some fears here that companies will be able to access newer, cheaper forms of software that replace Constellation and Topicus’s suite of products.
I have complete faith in Constellation’s ability to manage this risk and adapt. This is one of the best management teams in the country.
Constellation is approaching the largest drawdown in terms of price since its IPO. Members might look at a chart and say “how is this possible, it’s only down 23%”. However, this is accurate. Constellations largest drawdown in its 20+ year history as a publicly traded company is a mere 25.95%.
When you look to the chart below, you’ll see a lot of tiny bumps. However, the recent “bump” is pretty close to the largest.
Of note, the company is having a conference call on September 22nd to explain the current situation regarding artificial intelligence. This is notable because this is a company that does not host quarterly conference calls.
If I find enough value in the conference call, I will dedicate next week’s newsletter to going over it in depth.
The other notable move was my sale of Brookfield Renewables (TSE:BEP.UN). I do not believe the general investment thesis is broken on Brookfield Renewables, which is why it will remain on the Dividend Bull List.
The idea for me here is I am trying to find a bit of cash to relay it into other positions, including the one I’ll talk about today. And I still have exposure to Brookfield Renewables anyway through my position in Brookfield Corporation.
September Value Call – Waste Connections (TSE:WCN)
Waste Connections is a popular company here at Stocktrades Premium. I’m not all that surprised by this, as it is a low-volatility, defensive stock that, until its recent drawdown, was a 5-year outperformer of the S&P 500.
When you can blend these types of returns with low volatility, it quickly becomes a popular stock among investors.
Outside of a performance perspective, the popularity of Waste Connections during the high inflation/high rate environment we were in over the last few years was evident as well. The company did an exceptional job at passing inflationary costs on to clients and continuing to grow earnings, resulting in outsized growth in terms of share price.
Now, as the markets become euphoric and many investors transition out of defensive holdings like Waste Connections and into higher-growth holdings, I believe there is an opportunity, as Waste Connections is going through one of its larger drawdowns over the last 5 years.
Let’s dig into why.
Valuations are trending back to historical norms
There is no doubt that Waste Connections had gotten a bit ahead of itself, valuation-wise. Not to the point where one should have looked to exit their position, but certainly one where it was pricier than usual.
This isn’t all that surprising. In light of tariff issues, high inflation, economic worries and a stingy consumer, the trash business often carries on without issue, which it did.
But as you can see by the chart below, the company is getting close to its historical price-to-free cash flow valuation, trading at only a 7% premium.
Compare this to March of 2025, in which the company was trading at a 27% premium to historical values, and we have a business that is much cheaper today than it was just 6 months ago.
Make no mistake about it, Waste Connections is still trading at a premium to industry averages. However, I believe this is because it has provided some of the best operations in the industry, and the market is rewarding it.
Pricing growth maintained
Waste hauling is a non-discretionary service. Customers can’t simply decide to stop producing waste.
At the same time, waste disposal on a residential and commercial scale often represents a small portion of the budget of the consumer or company. This creates a situation where pricing power is immense.
Why? Because Waste Connections can raise rates with little pushback. Customers have few alternatives, as these waste operators are often the only companies available in the region, and the pricing increases are not as impactful because of the small allocation in terms of overall budget.
In addition to this, much of Waste Connections’ revenue comes through municipal contracts or franchise agreements. The vast majority of these clauses have pricing escalators due to inflation, fuel costs, etc. This creates an outstanding inflation hedge, plus the company can raise prices over and above this to drive more profits.
This is reflected in the chart below, highlighting Waste Connections’ pricing growth.
You’ll notice that during the higher inflationary period in 2022/2023, Waste Connections was able to more than offset the impacts that inflation had on its operations.
There is a key reason this can happen with a company like Waste Connections. Unlike Waste Management, which focuses on larger, more urban areas with heightened competition, Waste Connections focuses on smaller secondary markets in which it is the sole distributor.
This is a significant edge. Think of the company as not one gigantic monopoly, but operating a multitude of “mini-monopolies” in smaller regions.
This pricing growth creates tailwinds on improving volumes in the future
At this point in time, the economy is weak. Construction volumes are down, industrial activity is slower, and the company is reporting declines in overall waste volumes (see chart below).
As you can see, volumes have been low for multiple years. The slowdown in economic activity, especially from a “picks and shovels” perspective (construction, etc), has been apparent in the economy for a few years.
The company’s ability to raise prices is the reason cash flows are growing and the company is continuing to thrive.
At this point, you can say that pricing increases have been the “cushion” to weaker volumes. However, when construction and industrial activity pick back up, which is a realistic possibility in a declining rate environment, the pricing growth goes from a cushion to a long-term tailwind.
This is because the company is not going to reduce prices. So when volume picks back up, it will benefit from multiple years of pricing increases through larger revenue generation from waste disposal.
This dual engine of pricing + volume leverage is why the company has compounded at above-market rates for decades.
Landfills are the secret weapon many retail investors don’t even recognize
Owning the disposal end of the business is what separates large integrated players like Waste Connections from smaller haulers. It is also what makes smaller haulers ripe for acquisition by larger players like Waste Connections.
This is because if you don’t own the landfill, you will pay a decent chunk of your disposal fee to the company that does own it. If a smaller hauler is getting $100 per ton to dispose of trash but does not own the landfill, they might end up paying a company like Waste Connections $10-15 to utilize theirs.
This is why smaller players often operate on lower margins and are not as profitable. It is also why Waste Connections can make acquisitions, improve the margin profile, and tuck these smaller haulers in quite easily.
There is also the element that landfills are not pleasing to the eye or the environment. As a result, landfills are extremely difficult to replicate. Regulatory approvals can often take 10+ years, and communities now outright refuse to have them constructed.
Because Waste Connections already owns a multitude of strategically located landfills across its core markets, competitors face massive barriers to entry. So much so that they end up just paying Waste Connections the “tipping” fee to use the landfill.
There is also the element that landfills are filling up capacity wise, and because of regulatory approvals, we are not building them fast enough.
It is crazy to think of a landfill as an appreciating, cash-flowing asset. But that’s exactly what they are, and Waste Connections owns a lot of them, and has the cash flow many small haulers don’t have, which allows it to continue buying them.
The company’s acquisition strategy is conservative, but powerful
Waste Connections doesn’t chase massive headline deals the way some disposal companies do. While we often see Waste Management make large, multi-billion dollar headline deals, Waste Connections instead plays small-ball, acquiring privately owned, local or regional haulers, transfer stations, or landfills.
These small haulers operate in secondary or rural markets where Waste Connections already has exposure. What this does is allow the new acquisitions to be quickly integrated into existing routes and facilities. Trucks can be rerouted, landfills are already there to be utilized, and the company already has back-office systems in place to establish a corporate setup.
Since inception, Waste Connections has completed hundreds of acquisitions, deploying over $22 billion in total acquisitions. In 2024 alone, they executed 24 acquisitions for ~$2.2 billion of consideration, one of their largest years ever.
Because the acquisitions are integrated into the existing network of Waste Connections, they are highly accretive to margins and cash flow. What I mean by accretive is the fact they immediately add to the company’s cash flows over and above the price paid.
Each tuck-in acquisition strengthens route density, landfill utilization, and pricing power. Over the long term, this compounding through acquisitions is a key reason why Waste Connections has performed so well. Instead of trying to acquire home runs, they simply try to acquire singles and doubles.
Overall, I believe this is a long-term compounder that is now at more attractive prices
I plan to take a position in Waste Connections in the near future. However, I have been holding off here a bit because of the current market environment.
As growth and higher-valuation stocks fuel the market, the rotation out of defensive options like Waste Connections continues to put pressure on prices.
My strategy has worked out well up to this point in time, as the company continues to face one of its largest drawdowns over the last half-decade. If you look to the chart below, you’ll notice that outside of small “crash” like corrections, this is not a company that draws down for an extended period of time like we’re seeing now.
The difficulty here is judging where the bottom is. In a situation where there is a reasonable chance for prices to continue to fall, one could decide to slowly dollar-cost average into a company like Waste Connections over a set period of time.
The company is not “cheap,” and it is unlikely it ever trades at low multiples. However, multiples are much lower than they were even 6 months ago, and if one is looking for defensive shelter amidst a market they feel is running too hot, I think it provides a relatively attractive opportunity if it fits within one’s portfolio goals.
