We came across a bullish thesis on Watsco, Inc. (WSO) on Substack by FluentInQuality. In this article, we will summarize the bulls’ thesis on WSO. Watsco, Inc. (WSO)'s share was trading at $493.93 as of March 3^rd. WSO’s trailing and forward P/E were 37.14 and 33 respectively according to Yahoo Finance.

An engineer wearing a hardhat inspecting a newly-installed air conditioner system.

Watsco is North America’s largest distributor of HVAC/R equipment, supplying air conditioners, furnaces, and all essential components contractors need for installation, repair, and maintenance. Beyond just equipment, Watsco ensures steady availability of critical parts, including refrigerants, thermostats, and tools, making it an indispensable partner for contractors. Its ability to maintain inventory reliability solidifies its market leadership. However, Watsco’s dominance extends far beyond traditional distribution. The company has heavily invested in e-commerce and data-driven platforms, streamlining purchasing processes to enhance efficiency for contractors while fueling its own growth. This technological edge sets it apart in an industry that has been slow to modernize.

A key strength of Watsco’s business model lies in recurring demand. HVAC systems require consistent servicing and eventual replacement, creating a reliable revenue stream. With an extensive network and deep market penetration, independent contractors rely on Watsco as a one-stop shop for both products and expertise. The company’s financial performance reflects this competitive positioning, with a five-year average ROIC of 22.2% and a five-year average ROCE of 26.5%, demonstrating exceptional capital efficiency. Watsco’s ability to compound earnings is further supported by a 9.8% revenue CAGR and long-term EPS growth estimates of 9.0%.

The combination of a resilient business model, superior operational efficiency, and technological innovation positions Watsco as an industry leader. With a strong balance sheet and a free cash flow margin of 9.8%, the company is well-equipped to sustain its growth trajectory. This is not just distribution—it is market dominance built on reliability, recurring demand, and a forward-thinking strategy.

Watsco, Inc. (WSO) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held WSO at the end of the fourth quarter which was 37 in the previous quarter. While we acknowledge the risk and potential of WSO as an investment, our conviction lies in the belief that some 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 more promising than WSO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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