Is Watsco, Inc. (WSO) the Best Industrial Distribution Stock to Buy According to Hedge Funds?

Watsco, Inc. (WSO) has been a popular choice among hedge funds, with 554 of them holding its stocks, representing 95.4% of its total outstanding shares. This article explores the reasons behind WSO's appeal to hedge funds and whether it is the best industrial distribution stock to buy based on their collective wisdom.



WSO's strong financial performance and dividend growth have been key factors driving hedge fund interest. The company has delivered a 5-year revenue CAGR of 9.89% and a 5-year net income CAGR of 16.30%. Additionally, WSO has a 5-year dividends CAGR of 11.01%, indicating a consistent and growing payout to shareholders. These metrics compare favorably to other industrial distribution stocks like WW Grainger (GWW), which has a 5-year revenue CAGR of 9.89% and a 5-year net income CAGR of 15.67%.

WSO's market share gains and operational efficiency have also contributed to its appeal. Despite a challenging industry backdrop in 2023, WSO's unit volume for unitary HVAC systems decreased by only 8%, compared to an estimated 15% decline in industry shipments. This indicates a more balanced performance compared to the industry average. Furthermore, WSO has improved operating efficiency, reducing same-store SG&A by 1% in 2023 and planning further efficiencies in 2024.



WSO's strong balance sheet and entrepreneurial culture have also been attractive to hedge funds. The company has a strong financial position, with net cash as of December 31, 2023, which allows it to invest in growth opportunities. WSO's entrepreneurial culture has driven strong performance across many macroeconomic and industry cycles, with CAGRs of sales and operating income of 15% and 18%, respectively, since 1989.

However, WSO's performance in 2023, characterized by a 0.13% increase in revenue and a 9.17% decrease in earnings, reflects a challenging industry backdrop and a significant product transition to higher-efficiency systems in response to regulatory requirements. Despite these headwinds, WSO's operating cash flow increased by 40% to a record $299 million, demonstrating the company's ability to generate cash even in a down market.

In conclusion, Watsco, Inc. (WSO) has been a popular choice among hedge funds due to its strong financial performance, dividend growth, market share gains, operational efficiency, strong balance sheet, and entrepreneurial culture. While the company faced challenges in 2023, its ability to generate cash and maintain market share indicates a well-positioned investment for the long term. As Albert H. Nahmad, WSO's Chairman and CEO, commented, "In many respects, we consider 2023 an exceptional year given the extraordinary performance during the two preceding years and considering the softer comparative market conditions that have followed. We achieved market share gains during a down market, scaled the adoption of Watsco’s industry-leading technology platforms, drove productivity gains, expanded our network, fortified the quality of our balance sheet and once again provided our shareholders a meaningful dividend increase." Therefore, WSO may indeed be the best industrial distribution stock to buy according to hedge funds, given its strong fundamentals and long-term growth prospects.