If somebody offered you a brand new Ferrari for $1,000, you'd probably be extremely suspicious of the offer and/or the car. Quality products don't typically come at a bargain price, and that's something investors largely have to make their peace with in the industrial distribution/MRO sector, as quality names like Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and WESCO (NYSE:WCC) often look pricey. So it is with leading HVAC distributor Watsco (NYSE:WSO), and especially now that stocks in this sector have shot up 15% to 30% in just the last month.
If you're happy with a lower total return, or you believe that Watsco can grow free cash flow in excess of a 10% compounded annual rate over the next decade, maybe there's some appeal here. I don't find either of those clauses acceptable, though, and so I will watch this distributor from the sidelines as it continues to benefit from a healthy residential HVAC market and invests in IT and supply/logistical improvements that should pay rewards in the coming years.
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With Watsco, It's About Quality Versus Value