Why Are These Stocks Gaining In A Bearish Market?

Includes: ODP, OMX, RSG, SPLS, WCN, WM
by: StockRiters

Stocks have seen a correction in trading after posting solid gains last week. Although trading activity has been relatively light today, there are some notable gainers. We took a look at some prominent gainers in two sectors to see what is pushing these stocks forward when everything else in the market seems to be going south.

Waste Connections Inc. (NYSE:WCN): Waste Management Services companies have been facing some challenges as the weak economy has hurt MSW volumes. However, shares of WCN popped up recently. This was after the company announced that it is acquiring R360 Environmental Solutions Inc., a leading provider of non-hazardous oilfield waste treatment, recovery and disposal services.

WCN is acquiring R360 for approximately $1.3 billion in cash. The acquisition will allow WCN to expand its E&P disposal activities. The acquisition also adds a new revenue stream for WCN. It makes a lot of sense from a strategic point of view and hence the sharp rise in WCN shares.

WCN shares are trading around $32.70, up more than 10% from Friday's closing price. However, other stocks in the sector aren't doing as well. While shares of Waste Management Inc. (NYSE:WM) are currently trading around $34, marginally higher from Friday's closing price, Republic Service Inc. (NYSE:RSG) is trading around $28.60 today, marginally lower than Friday's closing price.

Strangely, though, YTD, WCN is down more than 1%, compared to a gain of more than 9% for the Waste Management Services Industry as a whole. WM and RSG have gained more than 3.8%, YTD.

In terms of valuation, WCN shares do not look very attractive at the moment. WCN has a P/E ratio of 24.18, which is higher than 15.19 for the Industry. WM currently has a P/E ratio of 17.23, while RSG currently has a P/E ratio of 15.73. WM and RSG look more attractive in terms of valuations.

WCN's dividend yield at 1.10% is also quite low. RSG currently has a dividend yield of 3.29% and WM has a dividend yield of 4.18%.

The sharp rise today has pushed WCN above its 50-day and 200-day moving averages. The MACD has also crossed the signal line. Although technical indicators are giving bullish signals, I think valuation for WCN is quite high.

In terms of valuation, WM and RSG look better bets at the moment.

Office Depot Inc. (NYSE:ODP): Another big mover today is ODP. Shares of the office supplier surged after an activist hedge fund Starboard Value disclosed that it has taken a 13.3% stake in the company, making it the largest shareholder.

Starboard also issued an open letter to ODP's CEO and board of directors. In the letter, Starboard outlined ways in which the office supplier can improve its operating performance. Office suppliers have been impacted by weakness in the labor market since their sales are closely tied to employment trends. But there have been signs of some improvement at ODP, which the company recently reaffirmed in its outlook.

Starboard believes that ODP's operating margins can improve significantly if the company cuts its expenses.

Meanwhile, there are also talks of consolidation in the office supplies industry. Last week, Fortune magazine, citing people familiar with the matter, reported that Staples Inc. (NASDAQ:SPLS) has drawn the interest of several private equity firms, including Bain Capital, for a possible buyout. The report noted that talks are in initial stages and an offer is not likely until late in the year.

Fortune's report last week and Starboard's disclosure of a stake in ODP suggests that the office supplies industry may see M&A activity in the future.

ODP shares today hit a high of $2.85. ODP is currently up nearly 6.5% to $2.65. Shares of rivals SPLS and OfficeMax Inc. (NYSE:OMX) are currently trading around $12 and $7.75, respectively. Both OMX and SPLS have slipped in trading today even as ODP posted significant gains.

Trading at a P/E ratio of 10.78, ODP looks attractively valued at current levels. SPLS has a P/E ratio of 9.08 and also looks attractively valued. OMX has a P/E ratio of 16.83.

ODP has gained more than 22% this year, outperforming the S&P 500. SPLS has fallen more than 12% this year, while OMX has gained more than 70%.

Technical indicators for ODP are also giving bullish signals. ODP is currently trading above its 50-day and 200-day moving averages.

Office suppliers industry could see some consolidation in the future. At current valuation, ODP and SPLS look good to gain exposure to the sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.