Steady, reliable growth -- that's what characterizes America's biggest garbage collection and disposal company, Waste Management (NYSE: WM).
Over the past five years, revenue has steadily risen, hitting $14 billion in 2013. During this same period, the annual dividend increased 29%, going from $1.16 to $1.50 per share, while shares rose more than 65%.
What captures my attention right now is that technically the stock has broken out of a cup-and-handle pattern and is edging toward key resistance at $45. If WM breaks through this key resistance level, shares should quickly run to $50.
This consistent growth has caught the attention of Bill Gates. According to Nasdaq's ownership summary, the Bill & Melinda Gates Foundation Trust is one of the top five holders of WM, with 18.6 million shares -- a 4% stake in the company.
As my colleague Marshall Hargrave said in his recent article on the company, "One of the richest men in the world is finding value in one of the dirtiest industries in the world."
But while WM is known for turning trash into cash, it's the company's innovation in green technology that is moving revenue forward.
In 2013, Waste Management generated 9.82 million megawatt-hours of energy, 6% more energy that the entire U.S. solar industry. The company generated this energy through its waste-to-energy and landfill gas-to-energy facilities.
The company's gas-to-energy facilities turn organic materials, decomposing at landfills, into methane. Its Wheelabrator subsidiary creates thermal energy by converting garbage to energy through 17 high-tech waste-to-energy plants. In the most recent quarter, the Wheelabrator segment generated $230 million in revenue, a 12% year-over-year increase. (That's not to overlook the fact that about 80% of Waste Management's revenue still comes from garbage collection.)
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Coming full circle, Waste Management uses the natural gas to power its garbage trucks. Currently, about 15% of the trucks are powered by natural gas harnessed by the company. By 2020, management hopes to convert at least 80% of its fleet to natural gas.
Continuing to develop its green presence, WM recently partnered with several gas-to-liquid technology companies in hopes of finding the most economical methods for turning garbage into biofuels and bio-chemicals. Over the long term, the partnerships should contribute to revenue and dividend growth, helping further drive the share price.
At present, the stock is technically strong and on the threshold of a major breakout.
Rising off a November 2012 low near $29, shares formed a major uptrend, gaining more than 50%.
In November 2013, the stock hit a multi-year high above $45. Unable to sustain the move, shares retreated, but the $40 level provided rock-solid support for the beginning of the year.
In April, WM rallied to $43, and then retreated in a small pennant formation. This trading resulted in a bullish technical continuation pattern, known as a cup-and-handle. This pattern is named because it resembles a teacup with a handle. The U-shaped cup formed between December 2013 and this April, followed by the handle forming later that month.
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Following the resolution of this pattern in May, shares inched higher. During June, the stock flirted with overhead resistance around $45. Shares are currently trading less than $1 below resistance, so a slight push could result in a breakout.
If the pattern is completed, WM should quickly run above $50. However, to minimize risk, I'd suggest taking a position in the stock only if shares break overhead resistance at $45.25. This strategy would result in 11% gains with very little risk.
The bullish technical outlook is supported by solid fundamentals.
For the upcoming second quarter, scheduled to be reported July 29, analysts expect revenue to increase 2.4% year over year, to $3.6 billion. For the full 2014 year, analysts project revenue will rise 2.2%, to $14.3 billion.
The earnings outlook is equally solid. Analysts estimate second-quarter earnings to improve 11.1% from the year-earlier quarter to $0.60 per share. Full-year earnings are expected to rise 9.8%, to $2.36 per share.
The company pays a $1.50 annual dividend for a forward yield of 3.4%. This should help put a floor under the share price.
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Risks to Consider: Until recently, reduced waste volumes in the industrial and construction sectors associated with a slow-growth economy were weighing on earnings. Another economic slump could again crimp spending, leading to less waste.
However, looking forward, analysts project waste production volumes will remain high.
Action to Take -->
-- Buy WM on a break above $45.25
-- Set stop-loss at $43.01, just below current support marked by the intersection of the major uptrend line
-- Set initial price target at $50.42 for a potential 11% gain by fall 2014
This article was originally published at ProfitableTrading.com:
Stock Less Than $1 Away From a Major Breakout 'Buy' Signal