Qualivian Investment Partners, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -1.4% was recorded by the fund for the third quarter of 2021, trailing the S&P 500 TR Index which had a 0.6% gain for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Qualivian Investment Partners, in its Q3 2021 investor letter, mentioned Watsco, Inc. (NYSE: WSO) and discussed its stance on the firm. Watsco, Inc. is a Coconut Grove-based HVAC company with a $10.6 billion market capitalization. WSO delivered a 21.70% return since the beginning of the year, while its 12-month returns are up by 15.86%. The stock closed at $275.71 per share on October 12, 2021.
Here is what Qualivian Investment Partners has to say about Watsco, Inc. in its Q3 2021 investor letter:
“What Attracts Us
Superior Business: • It is the #1 HVAC distributor with 15% market share. It is two and a half times larger than the next largest player. • It has high returns on invested capital and is relatively asset light. • Is extending and widening its already formidable competitive advantage due to a) its scale and b) its investments in its technology infrastructure. This leads to our differentiated view that Watsco will have higher EPS growth than consensus due to higher revenue growth and better operating margins.
Superior Reinvestment Opportunities: • It benefits from a long growth runway arising from its predictable end market demand as well as its consolidator role in the HVAC market: − The US has ~115 million installed A/Cs and furnaces, 92 million of which are over 10 years old. Systems last 10-20 years suggesting a solid replacement runway. − The installed base of HVAC units has grown at a 3.6% CAGR since 1980.
Superior Management / Capital Allocation: • Founder-led management team with focus firmly planted on long-term value creation: − Founder/CEO, Al Nahmad, and the President, his son AJ (in charge of the technology investments), own 12% of the company, however, they control 54% of the voting shares. − Focused on generating long-term value creation by growing market share organically and consolidating the industry. They are not managing short-term earnings results. “We care about the next quarter century not the next quarter…” (Click here to see the full text)
Based on our calculations, Watsco, Inc. (NYSE: WSO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. WSO was in 26 hedge fund portfolios at the end of the first half of 2021, compared to 22 funds in the previous quarter. Watsco, Inc. (NYSE: WSO) delivered a -3.83% 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.