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Investors are constantly on the prowl to find the next great idea. The elusive next Microsoft (NASDAQ:MSFT) to turn their investment into riches dangles like a carrot before the rabbit. This search constantly leaves investors working hard to justify a reason why the business they choose to invest in will be the next big thing. If one can find the next big thing, it will be hard to not make money as the company becomes popular and investors pile in to the story.

Covanta (NYSE:CVA) is a business that might fit this profile for eager investors. Not only is the timing of the company perfect, but I am finding a hard time killing the business when I do my analysis.

The company, Covanta Holding Corporation, through its subsidiaries, provides waste and energy services in the Americas, Europe, and Asia. It engages in the development, ownership, and operation of infrastructure for the conversion of waste to energy. The company also involves in waste disposal and renewable energy production businesses, as well as independent power production business.

Did you just read that? They take garbage - which no one wants and environmentalists worry about putting into the landfills for generations - and turn it into energy - a product that everyone needs. It's about as close to alchemy as I can find in this lifetime. Dictionary.com describes alchemy as this:

Any magical power or process of transmiting a common substance, usually of little value, into a substance of great value.

Hmmmm. I am pretty certain we can place trash in the category as a common substance with little value. If it was valuable, would it be in the trash heap? It is then turned into energy, which if you are alive, you know if of great value.

Now that we have found the modern day alchemist, we need to see if the idea is working by turning the idea into profits.

In fiscal years 2007-2009 the company generated $909 million in free cash flow. So far this year it has produced $243 million in free cash flow (through Q3). When I add that up, it looks to me to be $1.112 billion in free cash flow in 15 quarters. The company currently sports a $2.57 billion market cap. Not a bad 43% return from the business operations in 15 quarters based on today's market cap. As my readers know, I like to look at the business as if I were able to buy the entire company today. So if I had $2.57 billion laying around, I could buy 100% of this company, and could expect free cash flow projections for 2010 of $324 million. That is a smoking hot 12.6% return currently, for a modern day alchemist who is growing by leaps and bounds. What politician would not want to brag about how they will be the one who brings a company to their city who will solve landfill issues and care for energy demands?

Next, management did a great thing this past year and returned some of their cash hoard in the form of a special dividend in the amount of $1.50 per share. That was about a 10% dividend yield at the time. Until they use the cash to expand (which they are about to in Wales), this is a great stock in which the ability is there for very large dividends in the future. Even if they paid out half of their free cash flow in the form of a dividend, the income from the investment would be higher than most waste management companies as well as most electricity generating firms.

One more comforting factor is that the company is that over 10% of the company is owned by real estate grave dancer Sam Zell, and deep value shop Third Avenue Value (Marty Whitmans old stomping grounds). These guys usually know great value when they see it.

There are plenty of risks with CVA as there are with any business, and for sake of space, I will let the comment section below reveal those. But for an investor who is looking for the next great idea, CVA is a pretty solid place to start the searching.

Disclosure: I am long CVA. We are long .5% position in most client account in CVA

Source: Covanta's Modern Day Alchemy: Turning Trash Into Profits