Does Watsco (WSO) have a Long Runway for Growth?

Soumya Eswaran

Mon, Apr 28, 2025, 6:59 AM 3 min read

SouthernSun Asset Management, LLC, an investment management firm, released its “SouthernSun SMID Cap Strategy” first quarter 2025 investor letter. A copy of the letter can be downloaded here. In the first quarter, the strategy returned -8.60% on a gross basis (-8.76% net compared to a -7.50% return for the Russell 2500 Index and -5.83% for the Russell 2500 Value Index. The fund returned -9.41% on a gross basis (-10.06% net) over the trailing 12 months compared to -3.11% and -1.47% returns for the indexes, respectively, over the same period. In addition, please check the top 5 holdings of the strategy to know its best pick in 2025.

In its first-quarter 2025 investor letter, SouthernSun SMID Cap Strategy highlighted stocks such as Watsco, Inc. (NYSE:WSO). Watsco, Inc. (NYSE:WSO) is a distributor of air conditioning, heating, and refrigeration equipment, and related parts and supplies. The one-month return of Watsco, Inc. (NYSE:WSO) was -18.821%, and its shares gained 2.52% of their value over the last 52 weeks. On April 25, 2025, Watsco, Inc. (NYSE:WSO) stock closed at $456.08 per share with a market capitalization of $18.821 billion.

SouthernSun SMID Cap Strategy stated the following regarding Watsco, Inc. (NYSE:WSO) in its Q1 2025 investor letter:

"Watsco, Inc. (NYSE:WSO), the largest distributor of air conditioning, heating, and refrigeration products in North America, was a top contributor this quarter, posting record fourth-quarter results with sales up 9% and EPS up 15%. Digital platform sales continue to outpace offline channels, now representing 36% of total revenue, and management remains committed to investing in proprietary technology solutions for contractors. The 2025 outlook appears favorable, as the rollout of higher-priced A2L refrigerant units from HVAC OEMs should be a tailwind to equipment pricing. With no debt and $782 million in cash and short-term investments, Watsco has significant flexibility to pursue acquisitions in the highly fragmented $74 billion North American HVAC/R distribution market. We continue to believe Watsco has a long runway for organic and inorganic growth, an owner-oriented culture and competitive advantages that increase with scale."

A commercial air conditioning unit mounted atop a residential roof in a suburban neighbourhood.

Watsco, Inc. (NYSE:WSO) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held Watsco, Inc. (NYSE:WSO) at the end of the fourth quarter, compared to 37 in the third quarter. While we acknowledge the potential of Watsco, Inc. (NYSE:WSO) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.