Thursday, April 30, 2009
(Cont'd from above)...

Jim (cont'd):   

Watsco is a terrific play on a turn in housing… which by my count as we all know… although it changes every day, amazing it does change everyday… it is just 62 days away based on my June 30th bottom call… as the products Watsco distributes like ac units and heaters are put into new homes… they are also heavily levered to the sun belt where they do a lot of business in states like Florida and Texas… places where you have got to have air conditioning… now I expect housing to bottom, more important than that so does Bob Toll, he is the CEO of Toll Brothers, premier luxury home builder in America, he told us just last week… and he has been real negative about this housing call.

Watsco is a great stock to own if Bob Toll and I are right and things get better… but look, you have got a 4.4% yield, a notoriously big juicy dividend, so you are being paid to wait even if our turn call is early… people are constantly stopping me in hallways, in elevators, and ballgames… and after they ask me for my autograph and picture because they saw me give Melissa Rivers a hard time on “Celebrity Apprentice”… they say hey I guess we missed the whole move… I am here to tell you that because of some negative analysts, you are getting this one a steal in Watsco… a company that you probably never heard of until tonight… it could be an ATM machine for you… that is right… spewing cash.

How come the analysts at Piper Jeffrey disagrees with me… a couple of reasons…first he is does not believe in the quick turn in housing… frankly, I do not want him to make that big call for me… I want him to report on the company, not the national economy… second, he thinks that the companies valuation is too high… I do not want valuation views either… because if housing turns in my time table, his earnings estimates are going to be way too low and the stock will go higher… and because his target audience is largely mutual funds and hedge funds… oh, someone tell Obama… these are people who are trying to time the next decline in stocks… so he is not talking to you… he is not… he is not playing with your timeframe… and frankly, nor should he to be honest… the big guys, the mutual funds, especially the hedge funds, they are the ones who pays the bills at these firms… and that is who he has to cater to… you do not pay his bills, believe me.

However, he is creating an opportunity to buy this one a little bit cheaper than you should be able to… and have the dividend pay you to wait… you know I have got to tell you something, the hedge funds, most of which not only missed the rally that began at the beginning of March, but also are fighting it tooth and nail… they are desperate for stocks to pull back so that they can either get in at better prices, or not loose quite so much money on their short positions… or not look so badly vs. the averages… you know the instinct of most analysts are the same as most of the hedge funds… they are too negative… the analysts who downgraded this stock yesterday, he is a great example… do you know that he has actually been right on Watsco… although, his timing could have been better...

He upgraded it to a buy back on October 17th, when it was at $37... he had a 16% gain by the time that he downgraded it… but even with that record of bullishness, I think that they guy is either too afraid or too biased toward negativity to think that the stock could go any higher… let me go thru the downgrade, I need you to think like this… because what happens, a piece of research comes out and you think wow, I cannot own this stock, I have to sell it… I need you to know that that kind of thinking is pervasive on Wall Street… here is a snippet… while WSO shares should be a beneficiary of stabilizing housing market, we believe that this recovery will be slow and the stock already reflects its potential… translation, the market is too bullish about housing… and given the fact that Watsco has gotten too expensive… but is the stock really too pricey… alright, 22 times earnings, I mean that looks high, 12.5% long term growth rate… but that assumes that the current earnings estimates are right… Watsco is expensive if you do not believe that the housing market will recover… allowing this company to move a lot more HVAC merchandise… if you think like I do that housing is coming back… it is cheap.

The analysts and their hedge fund audience also look at Watsco as a $43 stock, up $14 from its low of $29... the guy who downgraded it does not believe that it could maintain its current valuation… but Watsco went from $29 to $43 because our garden variety depression ended… not just because of the potential for a turn in housing… now, see I look at it differently, I see a stock that was down $18 from its September high of $61... it was at $61 when things were about to get much worse… it could go back to $61 now that things are getting much better.

The analysts who downgraded Watsco, he cut his earnings estimates for 2009, 2010... not only is the guy not acknowledging that things could better…. he is assuming that things will get worse… makes no sense to me… not with the housing bottom this close… not, also, because of the stimulus bill which provides incentives for installing energy efficient items in homes… that includes heating, ventilation, and air conditioning… plus, there is a new refrigerant standard thanks to clean air act, that has been promoting the replacement of old HVAC systems.. the analyst can’t even acknowledge the fact that things can get better… they can’t be constructive either… this drives me crazy… we can though.

Not only does Watsco work as a housing bottom play, it could also be a huge winner off of President Obama’s recent moves to improve relations with Cuba…if we lift the embargo, and I realize that that is a big if… Watsco could easily expand into Castro’s backyard… the company is based in Florida… a boat ride away… Cuba desk really need infrastructure… and that includes HVAC systems… currently Watsco is the second largest holding in the Hertsfield Caribbean Basin Fund, which invests in companies that could benefit from developing places like Cuba… but also Jamaica and Trinidad… I would not buy this stock on Cuba alone, that is way too speculative… but listen, as a play on a bottom in housing with a big dividend and a speculative Cuban kicker… count me in… especially because it is going to be the next big thing when Obama opens up Cuba… you will be hearing a lot of guys on TV telling you to buy this or that when the Cuban wall comes down… Watsco will be the chief one… believe me, you will be ahead of the game.

Here is the bottom line…

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