By Gary Rafferty, co-portfolio manager of the HC Snyder US All Cap Equity fund
US equities have significantly outperformed most asset classes over the past 10 years and are, in most people view, not looking cheap! However, we are continuing to stumble across compellingly priced quality businesses across the US which we believe could be strong beneficiaries to our high conviction fund. We do not own any of the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks, and have not over the past 10 years, as they have rarely presented value for us. As such, we often get asked how we have been able to keep up, and outperform the US market which has been so heavily driven by these high growth tech businesses. Here we have proven that value, and attractive returns, can be found in plenty of sectors outside of technology, albeit a little less glamourous.
One such sector we have seen strong returns in has been waste disposal services, as a sub-sector of utilities, which has contributed meaningfully to our performance, despite being an underweight.
Clean Harbors, a Massachusetts hazardous waste disposal provider, and Waste Connections, a solid waste group headquartered in Texas, have both provided strong performance in 2021 and over the past decade. We like these kinds of stocks as they have a ‘locked-in’ nature and do not attract the limelight despite their ability to compound returns at reasonably high rates. Waste Connections is a group known for solid waste, and is a steady business with good pricing power due to the fact America’s municipal solid waste is very protected. The most up-to-date figures show the total generation of municipal waste is 292.4 million tons. Conversations across the planet are happening in how to tackle the waste problem, and recycling more, so companies such as Waste Connections are benefitting.
Waste Connections has been particularly strong when looking over the longer term. Over five years, this waste management holding has kept up with Meta (formerly known as Facebook) in the market, with significantly lower volatility.
When looking year to date, Clean Harbors has also outperformed Meta, and at points throughout the year it has been up almost 60%. Clean Harbors specialises in an array of services, including recycling, chemical and hazardous waste services and also healthcare. It is also North America’s largest re-refiner and recycler of used oil, providing great environmental benefits as a recycler that it is helping minimise the negative impact of these dirty industries. For example, recycled used motor oil can be re-refined into new oil, processed into fuel oils, and used as raw materials for the petroleum industry.
Due to the huge swings in the market – such as those we saw at the start of last year with a brief sell-off in tech stocks – we believe that we need to continue to stick with our instincts. For example, since inception in 2008 the fund has generated annualised outperformance of 2.5% versus S&P 500 without any exposure to FAANG stocks – proving it can be done. After all, FAANGs make up almost 20% of the S&P 500 on their own.
We believe high quality companies that are well positioned with low leverage can continue to see strong returns without having to own any FAANGs. A strictly bottom-up portfolio construction with intensive, fundamental research and valuation analysis can achieve great returns.