Among the large industrial distributors, Watsco (WSO) consistently stands out for its quality, and that quality has driven the shares to a decent performance since my last article on the company for Seeking Alpha – outperforming the industrial sector while matching the S&P 500 on a total return basis. There hasn’t really been any “magic” to this outcome, just a consistent execution track record, with incremental contributions from long-standing projects like digitalization and M&A.
It’s rare to write an article about Watsco that doesn’t include a “but the valuation” caveat, and that remains true today. I don’t think the stock is overpriced, but a prospective return in the mid-to-high single-digits may not be so exciting, and I do see some sentiment risk as analysts debate the near-term trajectory of residential HVAC demand. Were the shares to correct by more than 10%, the valuation argument would get quite a bit more interesting, and such pullbacks have happened from time to time.
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Watsco Continues To Execute Very Well, But End-Market Demand And Valuation Are Concerns
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