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Is Watsco Inc (WSO) A Good Stock To Buy?

In this article you are going to find out whether hedge funds think Watsco Inc (NYSE:WSO) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Watsco Inc (NYSE:WSO) the right pick for your portfolio? The smart money is in a pessimistic mood. The number of long hedge fund positions retreated by 3 recently. Our calculations also showed that WSO isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the recent hedge fund action regarding Watsco Inc (NYSE:WSO).

What have hedge funds been doing with Watsco Inc (NYSE:WSO)?

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 18 hedge funds with a bullish position in WSO a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Markel Gayner Asset Management held the most valuable stake in Watsco Inc (NYSE:WSO), which was worth $62.7 million at the end of the third quarter. On the second spot was Carlson Capital which amassed $47.5 million worth of shares. Motley Fool Asset Management, Renaissance Technologies, and Winton Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Motley Fool Asset Management allocated the biggest weight to Watsco Inc (NYSE:WSO), around 3.54% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, designating 1.25 percent of its 13F equity portfolio to WSO.

Judging by the fact that Watsco Inc (NYSE:WSO) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of fund managers that slashed their positions entirely heading into Q4. Intriguingly, Michael Gelband’s ExodusPoint Capital dumped the biggest stake of the 750 funds tracked by Insider Monkey, totaling about $0.9 million in stock, and Qing Li’s Sciencast Management was right behind this move, as the fund cut about $0.8 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Watsco Inc (NYSE:WSO) but similarly valued. These stocks are StoneCo Ltd. (NASDAQ:STNE), Fortune Brands Home & Security Inc (NYSE:FBHS), Halliburton Company (NYSE:HAL), and Entegris Inc (NASDAQ:ENTG). All of these stocks’ market caps are similar to WSO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STNE 34 615449 5
FBHS 31 640066 -3
HAL 32 513523 1
ENTG 19 488063 -5
Average 29 564275 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $564 million. That figure was $174 million in WSO’s case. StoneCo Ltd. (NASDAQ:STNE) is the most popular stock in this table. On the other hand Entegris Inc (NASDAQ:ENTG) is the least popular one with only 19 bullish hedge fund positions. Watsco Inc (NYSE:WSO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.2% in 2020 through June 17th and surpassed the market by 14.8 percentage points. Unfortunately WSO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); WSO investors were disappointed as the stock returned 15.4% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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