EP104: Small Caps, Tariff Plays & Insider Buys Worth a Look
Stock Ideas From Investment Professionals
Welcome, subscribers!
It’s the start of a new quarter, and investor letters are hitting our inbox. We’re here to pass along the stock ideas that stand out for their clarity, conviction, and upside potential.
This week’s batch includes everything from quietly compounding service businesses to tariff beneficiaries and beaten-down industrials with catalysts on deck. If you like discovering quality before the crowd does, forward this to a fellow investor. 📈
This week, we share 12 new stock ideas, including:
A hazardous waste management leader trading at a discount to its solid waste peers, with significant margin expansion potential and irreplaceable infrastructure assets.
A timber-focused REIT poised to benefit from escalating tariffs on Canadian lumber, with 100% of its production sourced domestically.
A tax and advisory services provider scooped up after a weak quarter. Its M&A-driven model resembles a well-known insurance roll-up from a few years ago.
A top-tier alternative asset manager with strong capital return to investors, benefiting from LP demand for private market exposure and industry consolidation.
One of the world’s leading commercial real estate service firms, with variable costs, a large investment management arm, and broad global diversification.
A national auto repair and tire chain with a long runway for recovery, offering high free cash flow, a hefty dividend, and exposure to aging vehicles on U.S. roads.
A century-old bakery with iconic brands and a 5% dividend yield, trading at a five-year low despite strong cash generation and recent acquisition upside.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
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Let’s get to it.
Merion Road Capital initiated a position in Clean Harbors (CLH), and it’s now the fund’s top holding. Clean Harbors is the largest hazardous waste management company in the United States. Merion Road believes the company has the ability to increase margins significantly as they rationalize pricing and flex their scale advantages.
During the quarter I uncharacteristically built a position from nothing into our top holding. Clean Harbors (CLH) is the largest US hazardous waste management company. Before digging into CLH I would like to diverge with a bit of personal history. In my early 20’s I worked at Macquarie Bank where our team was responsible for acquiring investments on behalf of our managed infrastructure funds and the bank’s balance sheets. One of my first assignments was the acquisition of a publicly traded municipal solid waste ('MSW') management company (Waste Industries). While not technically infrastructure per-se, MSW has similar characteristics like being an essential service, operating regional monopolies, and controlling scarce assets. In any case we paid something like 8-9x EBITDA which was a premium to the then trading multiple. Waste Industries is now a small part of GFL Environmental (GFL) which trades at 12x EBITDA. And GFL is actually at a notable discount to its peers of Waste Management (WM), Republic Services (RSG), and Waste Connections (WCN) that are at 15x. While hindsight is 20/20, buying into this asset class 15 years ago would have been a home-run given their strong cashflow and multiple expansion.
While hazardous waste is not entirely comparable to their MSW brethren, CLH has many attractive attributes. They own and operate scarce assets including nine incinerators and eight landfills where new supply is limited by a complex permitting process and significant construction cost. They maintain vertically integrated operations that allow it to control waste from collection through transportation and disposal; this activity similarly requires specialized permits for which the company maintains over 500. As the largest player in the space, CLH has a proven history of managing waste properly – a key consideration amongst customers given environmental ramifications. They also have scale benefits that include route- based efficiencies, capacity utilization, and the deepest breadth of service offering.
I view their business in broadly two segments, Environmental Services and Safety-Kleen Oil. Environmental Services provides waste remediation and cleaning services for various industries with particular concentration in chemical, manufacturing, refining, and auto service. Though many of these end-markets are individually cyclical, the diversification of their product offering and customer base will somewhat offset this. Additionally, these sectors should benefit from the ongoing shift to reshoring and increased regulatory / environmental scrutiny. Safety-Kleen Oil provides used motor oil collection and recycling; it is the most volatile part of CLH as profitability is largely determined by commodity prices. This business is currently depressed and accounts for just 13% of their consolidated EBITDA. CLH is taking steps to structurally improve these operations. For instance, by separating their feedstock during collections they can offer Group III base oils that receive a meaningful premium to Group II.
CLH has historically operated the Environmental Services business at a low to mid-20’s EBITDA margin. This is noticeably lower than the 30% range that most MSW operate in; this differential is even more jarring on an EBIT basis as CLH is less capital intensive than MSW. In early 2022 Republic Services acquired hazardous waste competitor US Ecology. A key part of their thesis was that they viewed the hazardous waste sector equivalent to the MSW sector 20 years go. Republic has said that they see 10 percentage points of margin expansion, to be achieved through further consolidation and a more rational approach to pricing. Since the acquisition, Republic has taken two double digit pricing increases and witnessed expanding margins. This approach is benefiting the industry as a whole, with CLH margins up 1.6% in 2023 to reach 24.5%.
CLH is currently trading at 10.6x consensus EBITDA for 2025, a meaningful discount to their MSW peers. Assuming the base oil business is worth just 3.0x EBITDA, the remaining business is trading at 10.8x. This is entirely too low given their market positioning, essential service offering, and meaningful barriers to entry. Furthermore, this discounted multiple gives no optionality to further margin improvement. If margins were to increase another 500bps (obviously over the long-term), consolidated EBITDA would be 20% above consensus and the multiple would fall to <9x. Keep in mind that Republic acquired US Ecology at almost 14x trailing EBITDA.
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