The Market Vectors Environmental Services ETF (AMEX:EVX) has been a bright spot this year in a down market. Consolidation in the waste management sector and money flowing to environmentally safe companies has the future looking good as well.
Money in Garbage
The primary reason for the outperformance of the EVX exchange traded fund (ETF) this year can be atributed to the strength of three of the top-four holdings. The top holdings are:
- Republic Services (NYSE:RSG) - nearly 11% of allocation
- Allied Waste Industries (NYSE:AW) - 10% of allocation
- Veolia Environment (NYSE:VE) - 10% of allocation
- Waste Management (NYSE:WMI) - 9% of allocation
With the exception of Veolia Environment, the top four holdings have performed exceptionally this year. Republic Services is currently the third largest waste management company in the U.S. The biggest trash company, of course, is Waste Management, which has made two offers for Republic Services this year, only to be shunned both times. As Republic Services was turning down offers from Waste Management to merge, it was putting together its own takeover bid for the No.2 player in waste management, Allied Waste Industries. With the potential of more merger activity in the waste management sector it is not surprising to see the stock rising.
Money in Hazardous Waste
After the top four holdings, which make up 40% of the entire ETF, the weighting of positions falls off drastically. The No.5 holding is Stericycle (NYSE:SRCL), a leading medical waste management company that has nearly 400,000 customers in North America and the U.K. Stericycle's typical customer would be a hospital or blood bank with waste that contains possible harmful pathogens. What is great about the way Stericycle disposes of the waste is that it can be used in waste-to-energy plants. The stock has been consolidating over the last 12 months after being on a tear for the prior ten years. With revenue growth of nearly 20% reported in July, the company continues to grow steadily and is a leader in its niche field.
Trying to keep a lid on a different type of hazardous material is American Ecology (NYSE:ECOL), which disposes of industrial waste and low-level radioactive waste. The stock is the No.10 holding in EVX and makes up almost 4% of the ETF. With the potential for new nuclear power plants in the near future, American Ecology would be a secondary beneficiary of the buildup. The one concern I have with American Ecology is the fact it generates 41% of its revenue from one customer, Honeywell International (NYSE:HON). I may be the only one concerned, however. The stock is up 45% so far in 2008.
Managing the Environment
Tetra Tech (Nasdaq:TTEK) has the advantage that its No.1 customer has bottomless pockets - the federal government. The environmental management and infrastructure firm gets over 40% of its revenue from the U.S. government. Its most recent earnings report showed sales up 40% from a year earlier, largely due to a 34% increase in the company's federal government division. The stock has been a top performer this year and is at an important inflection point. After hitting an all-time high of $30.05 in 2000, the stock finally made it back to $30 in August, only to fail at its first attempt to break out to a new high. If the stock can break above the old high of $30.05 it should create a buying signal as new investors flock to the stock. (To find out more about this short-term trading strategy, read Support & Resistance Basics.)
Bottom Line
While EVX might appear to be an ETF that is geared toward garbage, the returns have been nothing of the sort. The combination of the typical waste management firms and the waste management of the 21st century make EVX an interesting investment choice for all investors.
