TSX Top Pick: This Industry Leader Turns Trash Into Cash!

Waste Connections Inc. (TSX:WCN)(NYSE:WCN) is one of those defensive growth stocks that can help you navigate rougher market waters.

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Waste Connections (TSX:WCN)(NYSE:WCN) isn’t the sexiest industry in the world. Solid waste collection is a dirty business, but someone has to do it, regardless of the economy’s current state. That’s a major reason why shares of Waste Connections have been a pretty smooth ride out over the years, with far less-volatile ride than the TSX Index and more bountiful gains.

A slow and steady creator of wealth

While the stock has been a tad more volatile over the past year due to coronavirus disruptions, shares still look like a straight line up when you have a look at the long-term chart. Due to the defensive recession- and pandemic-resilient nature of waste collection, it’s not a mystery as to why WCN stock is a compelling place to be amid profound uncertainties given its low beta, which is currently sitting at 0.59 at the time of writing. In the face of a second wave, with the potential for another fear-driven market sell-off, you need stocks like Waste Connections that can have your back.

Waste Connections isn’t a name that will make you rich overnight on the advent of a safe and effective coronavirus vaccine. Still, it can help you build wealth at an above-average rate over time while helping you keep your wits once the markets head south in a hurry once again.

With the stock flirting with fresh all-time highs, many value investors may be reluctant to back up the truck on the wide-moat firm at these levels. With highly sought-after defensive traits and one of the most resilient operating cash flow streams out there, though, I not only think shares are worth today’s slight premium, but they could be worth a heck of a lot more in an era of profound uncertainty.

A big upgrade for the resilient cash king

Over the past few weeks, a handful of analysts upgraded Waste Connections, with Morgan Stanley analyst Jeffrey Goldstein delivering one of the most remarkable moves, initiating WCN stock with an “overweight” rating, slapping on a price target of US$120 (which works out just shy of CA$160), implying upside just north of 15% from today’s levels.

Goldstein appears to be a big fan of the multi-billion-dollar waste industry and its defensive growth profile, which could shine through and after this pandemic. As a firm with the urge to merge, Goldstein is also bullish on Waste Connection’s ability to create value via M&A moves. Indeed, it’s rare to come by a defensive growth stock as resilient as Waste Connections, and although shares are a hair away from all-time highs, Goldstein thinks the stock is at a compelling valuation, and I think he’s right.

Foolish takeaway on Waste Connections

At the time of writing, shares of WCN trade at 4.2 times book value, 5.1 times sales, and 25.8 times next year’s expected earnings, all of which are higher than that of the stock’s five-year historical average multiples of 3.4, 4.0, and 24.9, respectively.

Historically speaking, the stock isn’t cheap. With the highly uncertain environment that lies ahead, though, I’d say the modest premium is well worth paying for and think a greater premium could be commanded over the coming months, as investors look to play defence without compromising on the growth front.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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