Motley Fool Hidden Gems Investing - Unsexy Stocks, Rewarding Returns

Episode Date: April 7, 2022

Let's face it, some businesses just have that "Ick Factor" because they do the jobs most people don't want to do. (00:20) Jim Mueller discusses: - Whether people going back to offices could be a growth catalyst for Waste Management - The underrated subscription part of Rollins' business - How businesses like Sherwin-Williams can be compounding machines for shareholders   (12:00) Alicia Hammond discusses the psychological underpinnings of why we give someone "the benefit of the doubt" and how it relates to investing.   Stocks discussed: WM, WCN, ROL, SHW   Got a stock question? Email [e-mail]!   Host: Chris Hill Guests: Jim Mueller, Alicia Hammond Producer: Ricky Mulvey Engineer: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Chris Hill. Coming up, we'll take a closer look at the business of garbage. It's time to get trashy. Motley Fool Money starts now. I'm Chris Hill and I'm joined by Motley Fool Senior Analyst, Jim Mueller. Thanks for being here. Jim Mueller. Hello, Chris. Glad to be on the show. I mentioned the other day that people listening to the podcast can post a review of the show on Apple. If you include a question about a stock or industry or trend,

then we might use it on the show. We got a great question from John. The full name as it's listed on Apple is John, son of Bill, which I love. Here's a question. Now that people are slowly going back to offices and thus producing more trash as well as more businesses from which to to pick up. Do you think this could be a growth catalyst for waste management? Would love to get your take on one of the unsexiest good businesses around." Thank you, John. Great question. He's right. This is a good business. This is a decidedly unsexy business. You immediately thought of me. Not at all. Ticker symbol WM. Waste management, you and I were talking before we started recording, this is one of those

really good businesses that neither one of us ever thought to buy shares of. But am I correct that this is, in the business of trash in the United States, this is the dominant player? Oh, yeah. It's the dominant player. It generates revenue by collecting residential trash and commercial trash and industry trash and manages the landfills and manages recycling and probably even generates natural gas from the processes that handle trash and they run that into renewable natural gas. And I do know, if not all of their fleet of trucks, the vast majority of their fleet of trucks run on natural gas. Uh, so yeah, they're, they're big into trash. Um, so to John's question, um, and I like

the way he's thinking here, um, is this a catalyst for them? Um, cause it would seem as though the underlying thesis is correct. Yeah, it's a really good question. Uh, and I like the way he's thinking, but I think he might be a little bit too late. Um, so I did a little bit of digging in And the question is, how much of the business would be boosted? Basically, he's asking how much of the business would be boosted by, like, looking at the revenue line, by people moving back to the office and generating trash there. And I think a lot of that boost has already happened. So, I did some looking into how many Americans might be working from home and all that.

and we can go into that if you want, but I think the quickest way to answer this question is to look at management's projections for revenue and how revenue actually grew. And if you go to pre-pandemic 2018, 2019, management was saying, okay, we're going to grow revenue about 4% next year for 2018 and 2019. The actual numbers were a little lighter than that, 3% in 2018, 3.6% in 2019. And then they said the same thing in 2020. And this is February before the pandemic really locked down everyone in the country. Another 4% projection, and they actually dropped revenue. They declined by 1.5%. Then in 2021, looking forward, they said, okay, we're going to grow revenue 11%. And actual results was 17.8%. So a big jump in revenue. And whether that was from

people going back to work in 2021. Last year, as restrictions eased and more restaurants started opening up and more businesses started opening up and all that, I think that's what played through. It's not just people going back to work, but all the secondary and tertiary knock-on effects of more people eating out and going to concerts and stuff like that. It wrote a wave through the year. First quarter last year, 10.3% revenue growth. Second quarter, almost 26% revenue growth. Third quarter, back down to 21%. Still very good, but it's falling and it fell again in Q4 at 15%.

And now for this year, management's projecting only, quote unquote, only 6%. But that's a lot closer to what they had been projecting before the pandemic. So I think a lot of that wave of everything kind of opening up, office workers going back to work, restaurants, and so on, has already probably worked through the system for them. You look at the last 10, 15 years for this stock, it is a steady grower. Waste management is a dividend payer. This seems like for people who are looking at their portfolio and saying, yes, I want the rule breaker type stocks, but I also want some steady businesses that I don't have to worry about too much. It seems like waste management checks that box.

Oh, definitely. And you really need a company like this to balance off some of the high growth and the higher volatility of rule breaker type high growth stocks. It's been a strong dividend payer. It's been paying and increasing the dividend the past 15 years. The share price, oh man, over the past five years, it's gone from 72 to 160. So that's better than a double. And it doubled the five years before that. So we're talking over 10 years, 16% annual growth before the dividend. So it's been a very solid business to own, nice performer, fairly steady stock price.

It's not always up and to the right, but it's a pretty nice looking line. And I'm going to have to look further into it and see if I want to buy some shares because it's it's I've I've I did some research for David Gardner back in the day when I was working on Stock Advisor before he before he finally put it into the service. But I've always I've always liked it and like what they do and their monopoly like thing. They're the biggest owner of land landfills, for instance, and they're not building many more of those. Before I let you go, John's question brings to mind the concept of unsexy businesses, which I also, as I mentioned, don't own Waste Management. I did last year inherit shares of a few different stocks and was looking through and realized that one of them is a mini version of Waste Management. It's a company called Waste Connections, ticker WCN. It's

about half the size of waste management. The stock chart is similar to waste management. That's probably the unsexiest business I own shares of. What are a couple of other businesses that you think checks the box there? It really is true that a lot of investors, particularly when they're starting out, think in terms of excitement, confusing excitement with a rewarding stock. And the fact is, there are some really boring, unsexy businesses out there that can reward you if you're a long-term shareholder. You can get very rich owning the most boring ick factor stocks around. I mean, waste management, garbage, who wants to deal with garbage? that's an ick factor stock

my favorite ick factor stock besides waste management is Rollins ticker R-O-L and they're the ones who own the Orkin brand of pest control and cockroaches termites bed bugs and

they deal with all that they also own a whole bunch of other brands so they've branched into critter control so if you've got bats in your belfry you might want to call them but they'll remove raccoons, for instance, and rats and foxes maybe if they come into Capitol Hill, for example. But they're a very steady grower, nice margins, 35% return on equity,

52% gross, 18% operating margin. They've grown their revenue by 9% a year on average over the past five years, and they also pay a dividend, which they've been paying since 1987, and they raised it for something like 20-some-odd years before they had to cut it a little bit in 2021 as the pandemic really got flowing. But it's a very nice business, subscription-based, which you might not think of, but people in restaurants and hotels especially where you don't want those critters in, and the health department frowns very heavily at you if you do so steady business recurring revenue they've done some work to optimize the routes that their

technicians do giving them more time to talk with the customer hey well I just treated your house or your business for for roaches and have you noticed any other things that might be coming in that we could help you with so it gives them a more chance to get more business from steady customers and yeah it's a a nice, boring, unsexy, unhip business that I own and I've been a very happy shareholder with. I know Sherwin-Williams gets name-checked a lot in terms of boring businesses. I don't think it has the ick factor that you mentioned, which I hadn't thought of that

before. But it's not exciting, but it's, again, it's another one of those rewarding ballast type of stocks. Again, yeah, Sherwin-Williams. That was a Tom slash Everlasting pick in Stock Advisor. First time back in March 2008. It has returned 1,660% since then. It's done very well and probably was the recommendation that landed with a plop the most out of Tom's side of Stock Advisor. Better than 60% return on equity, 40 plus percent gross margin, 13% gross margin, revenue growth 11% for the past five years. It's paid a dividend since at least 1987, which is as far back as

my data goes. If you reinvest those dividends, you get more shares and more dividends in the future. I love that compounding on businesses that do a basic function, they do it very well and they do it for a very long time. Jim Mueller, it's opening day for Major League Baseball, so I'm going to let you go. Thanks so much for being here. Thanks, Chris. Keep those questions coming when you post a review on Apple. You can also email questions to podcasts at fool.com. That's podcasts at fool.com. If you've been listening to this show for a while, you have heard me say on multiple

occasions, we're in an environment right now where Wall Street is not giving any company the benefit of the doubt, which begs the question, why do we give anyone the benefit of the doubt? To help shed some light on this is Alicia Hammond, a user experience researcher here at The Motley Fool and a psychology instructor at Cuesta College. Alicia, thanks for being here. Alicia Hammond. Thanks so much for having me, Chris. What are some of the psychological underpinnings of why we give someone the benefit of the doubt well usually when we're talking about the benefit of the doubt we're going to dive into social psychology and talk about attribution

theory so attribution theory is a family of theories that describe how people assign causes to events so let's say uh the event one caused event two now this can be anything from uh events personality traits etc but usually we're talking about causal attributions which is linking an event to a cause so saying like a personality a personality trait caused a behavior a pessimistic attributional style is associated with lower grades and poorer physical health so there's some like real negative consequences to going about the world explaining in this pessimistic way versus if you have an optimistic attributional style optimistic attributional style is associated with better health, happier marriages, and higher levels of happiness within individuals.

There are some real benefits to being a little bit more optimistic when you're explaining what's going on in the world. The act of investing in the stock market itself is, in many ways, an act of optimism. Thinking about attributional styles, it's not to say that you're better off going through you're investing life with rose-colored glasses, but it does make me wonder if people who are more pessimistic are more likely to trade more frequently in their investing lives, because the slightest miss in an earnings report, a misstep by a CEO, it's easy for me to imagine someone who has that approach, a pessimistic approach, just say, well, I'm

not giving you the benefit of the doubt, I'm selling my shares of this stock, or am I wrong? How do attributional styles affect people's investing behavior? Well, to me, that sounds like a really cool opportunity for an experimental study, Chris. So if I ever end up going back to grad school, maybe that'll be what I do. As far as investing, taking this long-term approach requires a lot of optimism because it's like a marathon. You got to know how to keep yourself optimistic in the long run. So, having this optimistic style, I would assume probably is beneficial in our particular flavor

of investing. A question we get all the time at The Motley Fool, we have forever, we will continue to get, has to do with selling a stock. And look, everyone's different. Some people take a very mathematical approach to their investing, and that includes selling stock. There are people who say, well, I'm never going to let a single position get to be larger than 5% of my portfolio, and no matter how I feel about this company, if it gets to be over 5%, I'm selling some. But you and I were talking earlier, there are some people who feel attachments to companies. I feel that with some of the companies in my portfolio. But you described something that I'd never really heard it described this way before,

for some investors, not all, but for some investors, selling a stock can be like going through a breakup. Can you share some color of how and why that is? People anthropomorphize companies all the time. Products are anthropomorphized, mascots, brands, etc. We often describe things like Coca-Cola as a friendly brand, that sort of thing. Well, we can anthropomorphize whole companies in ways that are a little bit surprising when it comes to their stock price. So the investors that I spoke with really described selling a stock as going through a breakup. So they purchase the stock oftentimes many years in the past. And when they're sort of alerted to the idea that it might be time to sell for various reasons, they start to

have thoughts such as, I have to overcome the idea of what I thought this company should be, could be. And I have to kind of come to terms with the fact that my feelings about this company have changed, almost as if speaking about someone you're in a relationship with. And they then described these sort of factors that changed that sounded to me a lot like the concept of like red flags when you're breaking up with someone. So while a red flag for a relationship might be incompatible values, right? Say one partner wants kids and one doesn't. A red flag for a company and an investor would be something like the CEO has changed or something essential about the product has changed, the company itself, like its business structure has changed, or maybe even

society has changed and that company is no longer fits into like an ideal version of society for the investors. So the investors sort of need to take stock of like what has changed and overcome the sort of like emotions that are associated with like, I've been with this company for a long time and I used to believe in them. Changing your mind is a very cognitively difficult process, and it can be a very emotional process. We found that when investors are thinking about breaking up with a company, or thinking of selling a company, it can often really feel similar to a breakup. Now that people listening, maybe in some cases for the first time are starting to think about themselves in terms

of attributional style. Am I someone who is likely to give the benefit of the doubt? Am I not likely to give the benefit of the doubt? What advice would you have for people now that they have a better sense of this concept of how they can put this to greater benefit in their investing life? We want to give our friends the benefit of the doubt. We want to give people we're in relationships with the benefit of the doubt. We want to think of them as their behaviors are being caused by the situations they're in and not like fundamentally misaligned with our own goals and values. So give companies the benefit of the doubt. When you feel negative about something that's happening, you just have to sort of do a gut check, right? Like, is this company still

aligned with my goals and values, just as you would a friend or a relationship? And that helps you feel more able to trust them and hopefully stick with them for the long term. If there's a red flag and the company feels no longer compatible with you or say your investing thesis has changed, then know that it might be time to move on. But if you think of companies as friends, if you anthropomorphize them a little bit, psychologically, that's a little bit easier for us to do than thinking of companies as these like massive chaotic blobs that just have so many pieces, which they are. But there is a benefit and there is a certain ease to thinking of a company and thinking of complex objects in

this way. Alicia Hammond, thanks so much for being here. Thank you for having me. That's all for today, but coming up tomorrow, we'll dig into the business side of the Masters and the start of the Major League Baseball season. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.