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Is Watsco (WSO) A Smart Long-Term Buy?

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Qualivian Investment Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. In Q1 2021, the fund underperformed the S&P500 by 3.7% and 3.9% on a gross and net basis, respectively. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Qualivian Investment Partners, in its Q1 2021 investor letter, mentioned Watsco, Inc. (NYSE: WSO), and shared their insights on the company. Watsco, Inc. is a Miami, Florida-based HVAC company that currently has a $10.9 billion market capitalization. Since the beginning of the year, WSO delivered a 23.70% return, while its 12-month gains are up by 64.31%. As of June 22, 2021, the stock closed at $280.24 per share.

Here is what Qualivian Investment Partners has to say about Watsco, Inc. in its Q1 2021 investor letter:

"The only change we made to the portfolio was that we purchased more Watsco (WSO). Watsco is a dominant HVAC distributor in a stable industry sector. It has a widening moat, a dominant and increasing market share, high returns on invested capital, a long reinvestment runway, and a founderled mentality. We have discussed Watsco in two of our previous letters (Q2 2019 and Q3 2020)."

HVAC, Aircon
HVAC, Aircon

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Our calculations show that Watsco, Inc. (NYSE: WSO) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, Watsco, Inc. was in 22 hedge fund portfolios, compared to 24 funds in the fourth quarter of 2020. WSO delivered a 10.04% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.