LRT Capital Management, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. A return of -7.37% was recorded by the LRT Economic Moat strategy for the first quarter of 2022, resulting in a 12-month return of +16.72%. In the LRT Economic Moat strategy, as of April 1st, 2022, the fund’s net exposure was approximately 99% and its estimated net beta-adjusted exposure was 62.2%. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, LRT Capital Management mentioned Watsco, Inc. (NYSE:WSO) and explained its insights for the company. Founded in 1945, Watsco, Inc. (NYSE:WSO) is a Miami, Florida-based HVAC company with a $10.4 billion market capitalization. Watsco, Inc. (NYSE:WSO) delivered a -14.73% return since the beginning of the year, while its 12-month returns are down by -9.71%. The stock closed at $266.78 per share on April 29, 2022.
Here is what LRT Capital Management has to say about Watsco, Inc. (NYSE:WSO) in its Q1 2022 investor letter:
“Watsco is a long time holding of our fund that recently made it into the top ten. The company distributes Heating Ventilation and Air Conditioning equipment (HVAC). The HVAC distribution business is approximately 80% replacement / 20% new construction. This is a great business due to the fragmented supplier base (seven major HVAC manufacturers) and fragmented buyers (thousands of HVAC contractors). This limits the bargaining power of both buyers and suppliers. Furthermore, while homeowners ultimately pay the bill, in most cases it is the contractor that makes the purchasing decision. Parts availability, speed of delivery and ease of installation play a major role in the purchasing decision with price being only a secondary consideration. Most HVAC equipment is bulky and difficult to ship – limiting competition from online players. Simply put, when your HVAC unit breaks on a hot summer weekend you don’t spend time shopping around for the lowest price – fixing the AC unit becomes a priority no matter the cost. The company’s earnings are also extremely predictable given that most sales are tied to replacement demand which itself is a function of the installed base.
Watsco is the largest player in a very fragmented industry. The company earns mid-teens returns on invested capital and pays out most earnings in the form of dividends. The company also expands through acquisitions over time, buying up smaller independent HVAC distributors. Most recently they have acquired Temperature Equipment, a Chicago based distributor67. Watsco also has the most unique long-term compensation policy for senior executives we have ever come across in corporate America – all stock grants vest at retirement or after 10 years, whichever comes later. This makes managers extremely long-term focused, something we believe is a real benefit for a company that grows primarily through acquisitions. We believe the shares are attractive at current valuations given the extremely predictable earnings the company enjoys, recession proof nature of the product and long growth runway. GAAP earnings are understated due to the amortization of intangible assets related to prior acquisitions.”
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Our calculations show that Watsco, Inc. (NYSE:WSO) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Watsco, Inc. (NYSE:WSO) was in 31 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 30 funds in the previous quarter. Watsco, Inc. (NYSE:WSO) delivered a -5.58% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
