(MONEY Magazine) – Swimmers were disgusted and environmentalists alarmed as medical and other waste washed up on East Coast beaches this summer. But those unattractive scenes should send an upbeat message to investors. Waste disposal and pollution control will continue to provide fast-growing profits for companies that specialize in environmental cleanup. Moreover, investors willing to hold volatile environmental stocks for three years or longer can now buy them at attractive prices. In the past, not only have such issues outperformed Standard & Poor's 500-stock index (see the chart at right) but also have frequently sold at double the price/earnings ratio of the S&P 500. Since the market crash last fall, however, some of the strongest environmental stocks have been selling at less than 1.4 times the market multiple.

Analyst Larry Jeddeloh of the Leuthold Group, an investment advisory firm in Minneapolis, notes that governmental expenditures -- especially through the $4 billion Superfund -- have fueled uninterrupted growth for waste-treatment companies. Says Jeddeloh: ''They are being powered by the public's willingness to fund efforts to protect the environment.'' Analyst Jeffrey A. Klein of Kidder Peabody points out that waste-disposal companies often enjoy near-monopolies. Potential competitors that do not already have incinerators and landfills are having increasing difficulty getting regulatory approval for new facilities. Klein particularly favors Waste Management, with $3.5 billion in annual sales the largest company in the field, which owns 120 landfill sites in the U.S. and Canada plus 81% of the stock of Chemical Waste Management, a hazardous waste disposal company. For similar reasons, analysts recommend $230 million Rollins Environmental Services, the leading firm in hazardous waste incineration. Among smaller companies, Jeddeloh's top pick is $79 million Thermo Instrument Systems, a major supplier of instruments that measure acid rain and toxic pollutants. Analyst William J. Ritger of Dillon Read & Co. recommends two stocks that could benefit greatly from recent federal legislation requiring companies generating hazardous waste to treat it on site. Groundwater Technology, $66 million in sales, specializes in decontaminating soil and groundwater that contain pollutants such as leakage from oil tanks. Environmental Treatment & Technologies, $137 million, provides cleanup services and environmental monitoring for the chemical, oil and auto industries.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: Environmental stocks clean up Over the past 12 years, the shares of companies that provide environmental and | antipollution services have skyrocketed nearly twentyfold, despite steep swings recently, while Standard & Poor's 500 index, with dividends reinvested, has only tripled. DESCRIPTION: S & P 500 is compared to the Ecology Technology stock index, 1976-1988.