Investing

Goldman Sachs just got very bullish on garbage because it's afraid the economy is rolling over

Key Points
  • Goldman Sachs upgrades Waste Management to buy from sell in a rare "double upgrade," telling clients that trash stocks may prove to be a defensive strategy.
  • "We believe that Waste offers an alternative from the current economic risks and as a result investors should rotate into the group," analyst Brian Maguire writes.
  • Shares are up 7.8 percent since January and have remained above their 200-day moving average for the vast majority of the year.
A worker empties garbage from a Waste Management trash bin in Seattle.
David Ryder | Bloomberg | Getty Images

Garbage stocks may be the key to success in a sluggish economy, and Waste Management "should be a core holding in every portfolio," according to Goldman Sachs.

The firm on Monday raised its rating on the trash giant two notches to outperform from underperform, a rare "double upgrade."

"Given the age of the current business cycle and expectations for slowing economic growth, we believe now is the right time to own waste stocks," analyst Brian Maguire wrote to clients. "The waste sector not only compounds earnings growth at a higher rate than the overall market, but it does so with much less volatility and draw-downs in its earnings."

The $40 billion garbage and recycling company's stock has outperformed the broader market this year and proved to be a reliable bet amid growing volatility. Shares are up 7.8 percent since January and have remained above their 200-day moving average — often considered a barometer of whether securities are in a healthy long-term trend — for the vast majority of the year.

The VanEck Vectors Environmental Services ETF, an exchange-traded fund that tracks an index of companies that benefit from increased demand for waste management, is up 7.4 percent this year and more than 8.1 percent in the last 12 months. Maguire raised his 12-month price target to $107 from $84, implying 14.9 percent upside over the next year.

Shares rallied 1.8 percent Tuesday morning following the Goldman note.

The Houston-based company posted its best day in more than a decade in July after it raised full-year guidance and beat Wall Street's earnings expectations. The better-than-expected equity results have persisted through an uptick in interest rates and fears of economic slowdown that roiled markets at the start of the fourth quarter.

"If GDP growth and the ISM have peaked then we would expect investor interest in Waste stocks to continue to build as the cycle continues to age. And, while Waste stocks have outperformed year to date, we believe that this historical tendency to outperform the most during recessions means that even greater outperformance could lie ahead," Maguire said.

A recent inversion of the yield curve, where the shorter-term Treasury yields rise beyond longer-term yields, created some concern about the economic outlook as well. The gross domestic product has grown at a robust clip of around 3.5 percent, a rate many market participants believe may signal inflation thanks to the Trump administration's massive tax cuts.

Given the resiliency in Waste Management shares throughout this year, combined with strong management and consistent earnings, investors may want to take cover in the company if future economic data turn sour, Goldman added.

"In short, we believe that Waste offers an alternative from the current economic risks and as a result investors should rotate into the group," Maguire wrote.

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