Recycling Stocks: Turning Waste Into Profits

by Jack Robinson

Originally a way of life for thrifty, self-reliant people everywhere, recycling today is an essential part of living a green lifestyle that reduces waste, helps curb climate change, and re-uses resources. For businesses, recycling is a means to reduce raw material and energy costs, secure supplies, minimize waste streams, and lower pollution levels – and make money.

In fact for many companies, recycling is now an indispensable tool for achieving competitive advantage. A study by the National Recycling Coalition (NRC) and the EPA estimated that recycling in the US is an industry with over $236 billion in annual sales, employing 1.1 million people. And as the industry grows, so do its benefits to people and the environment.

Lots of Room to Grow

As large as the recycling industry is today, there is still plenty of room to grow. Two-thirds of the steel produced in the US is processed from recycled steel and iron, which is far less expensive and less energy-intensive to produce from recycled materials than from virgin materials. According to the Institute for Scrap Recycling, processing recycled iron and steel uses 74% less energy than processing virgin materials.

The American Forest and Paper Association reports that the paper-recycling rate in the US reached a new high of 51.1% in 2005, up from 30% in 1990 and second only to steel. The EPA reports that recycling paper consumes only 36% of the energy that virgin paper uses, as well as using far fewer chemicals.

With only a 17% recovery rate (representing 800 million pounds), plastic recycling holds the biggest opportunity for growth, especially plastic bottles. Recycling plastic saves 80% of the energy used in manufacturing virgin plastic, and reduces the use of petroleum-derived raw materials to make the plastic. On average, Americans purchase 200 plastic bottles each annually, 80% of which – or 3.2 billion pounds – end up in landfills.

Non-ferrous metals is the last major category of recycling and includes all the metals except iron and steel – including aluminum, copper, chromium, lead, tin, and zinc, among others. Of these, aluminum may be the most compelling recycling story. According to the Clean Air Council, recycling an aluminum soda can saves 96% of the energy used to make a can from its virgin source, bauxite; it also produces 95% less air pollution and 97% less water pollution. As a result, there’s a major economic advantage to producing recycled aluminum that only increases as energy costs rise.

Investment Implications

To get a sense of how the shareholders of public US recycling companies are faring, we created an index of 15 publicly traded, US-based companies identified by the Canaccord Adams Resource Optimization and Sustainability Group as diverse recycling companies. We compared the five-year performance of this equal-weighted index to the Russell 2000 Index (many of the stocks are small caps) and the S&P 500.

Through the end of February 2007, the recycling companies performed very well, increasing over 200% over the period versus a gain of 23% for the S&P and 56% for the Russell.

While past performance is not indicative of future results, the macro environment for recycling is positive. The virgin raw materials required for the manufacture of metals, paper, glass and plastics in finite. We believe the combination of finite supplies, rising costs, and escalating demand worldwide means continuing high prices for most basic raw materials, a key driver that should lead to profitable and continuing growth of recycled content and the recycling industry.

Recycling Index

Appliance Recycling Centers of America, Inc. (ARCI)
Caraustar Industries (CSAR)
Casella Waste Systems, Inc (CWST)
Darling International, Inc. (DAR)
Interface, Inc. (IFSIA)
Kadant, Inc. (KAI)
LKQ Corp. (LKQX)
Metal Management (MM)
Metalico, Inc. (MEA)
Schnitzer Steel Industries, Inc. (SCHN)
Startech Environmental Corp (STHK)
Synagro Technologies, Inc. (SYGR)
Trex Co., Inc. (TWP)
Waste Industries USA, Inc. (WWIN)
Wellman, Inc. (WLM)

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Jack Robinson is president and CEO of Winslow Management Company, LLC, and independent Boston-based investment management firm that specializes in small-cap growth equity investing and the Winslow Green Mutual Fund.

FROM Co-op America’s Real Money, a SustainableBusiness.com Content Partner.