A Trash Trade That Could Hold Treasure
The following post is a Guest Blog by CNBC Contributor Brian Stutland.
Waste Management is in the business of turning trash into cash, but its 2012 performance has left many investors disappointed.
The stock is up 8.9 percent year-to-date, but has lagged its peers and the S&P 500. Still, the company has a record of consistently raising its dividend, and is a favorite of investors seeking yield. The company has just announced it will be raising its quarterly dividend by 2.8 percent, pushing the stock's current yield to 4.2 percent.
On Monday, we saw a trader make at bet that the stock will catch a bid in the first half of 2013. Specifically, with the stock at $34.24, this trader bought 10,000 July 35-strike calls for $1.20 each. This trade will profit if WM is above $36.20, or 5.7 percent higher, at July expiration.
What has held Waste Management back in 2012 is its year-over-year declines in net income. This has been the result of lower commodity prices.
Waste Management does have a stellar balance sheet, though, which has allowed it to continue raising its dividend. And its sheer size has let it largely unaffected by smaller competitors entering the industry. Recently, the company has said that in 2013, they expect operating cash flow to grow by double digits, which is the reason behind its dividend hike.
Waste Management's success in 2013 will largely be tied to two factors: the strength of the U.S. economy, and the company's ability to reduce costs in order to increase margins. CFO James Fish is implementing a plan to flatten the management structure in order to unlock long-term efficiencies, but this could actually lead to increased costs in the short term.
Therefore, while I like the Waste Management story, I would rather buy calls alongside this trader than buy the stock. That way, if economic growth stalls in the first half of next year or if Waste Management's restructuring is ineffective, my risk will be limited to $1.20.
On the upside, if Waste Management is able to increase its net income and provide upward guidance, the stock could take off in 2013, and this trade will turn in some serious profits.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
Watch "Options Action" on CNBC Fridays 5:00 p.m. ET, Saturdays at 6 a.m. ET and on Sundays at 6 a.m. ET.
Questions, comments send them to us at: email@example.com