The Most Disgusting Stock on the Market Has +100% Upside

Legendary fund manager Peter Lynch went out of his way to find companies that did yucky things because they were often great businesses. My approach takes that concept one step further: I've found one stock that provides an underlying service for a whole sector, a service the sector simply can not do without, yet the business is so gross, so undesirable, that it's shares are sharply undervalued by Wall Street.

Have you ever wondered what happens to the parts of a chicken that don't get eaten? Or the grease a restaurant throws out after it's used? After all, someone also has to remove used cooking oil and pump grease traps. Turns out there are companies that provide recycling and rendering services through which animal and food waste products are turned into useful commercial goods, including tallow, protein meals (meat and bone meal) and yellow grease.

The largest company of this kind is Darling International (NYSE: DAR). Darling collects the grease from restaurants and along with the byproducts from meat packing plants, butcher shops, grocery stores and independent meat and poultry processors. From these raw materials, Darling creates two products: meat and bone meal, and tallow. These items are converted into a lot of useful everyday products, including feed, soap, candles and even explosives. These products are then sold globally.

Who would've thought a company like this would even exist? Yet it does, and has since the late 1880s.

I don't like to throw a lot of numbers around, but it's important for investors to look at the table below because it summarizes why I think Darling is a compelling value that is being totally overlooked by the market.

I happen to be very big on the PEG ratio as a guide. When I see a PEG near 0.50, it suggests that the stock's fair value is about +100% higher than where it currently trades. Another ratio I look at as a guide is the EV/EBITDA ratio. (This assigns a multiple to stocks and allows investors to gauge a company's value as a takeover target.) Anything under 7.0 for a stock in this sector has historically been undervalued, when one looks at buyout offers made during the past 20 years.