3 Reasons Growth Investors Will Love Watsco (WSO)
Watsco (WSO) is well positioned to outperform the market, as it exhibits above-average growth in financials.
Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. However, it isn't easy to find a great growth stock.
By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.
However, the task of finding cutting-edge growth stocks is made easy with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.
Watsco (WSO) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it carries a top Zacks Rank.
Studies have shown that stocks with the best growth features consistently outperform the market. And returns are even better for stocks that possess the combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy).
While there are numerous reasons why the stock of this heating and cooling company is a great growth pick right now, we have highlighted three of the most important factors below:
Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Watsco is 9.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 45.8% this year, crushing the industry average, which calls for EPS growth of 28.3%.
Impressive Asset Utilization Ratio
Growth investors often overlook asset utilization ratio, also known as sales-to-total-assets (S/TA) ratio, but it is an important feature of a real growth stock. This metric exhibits how efficiently a firm is utilizing its assets to generate sales.
Right now, Watsco has an S/TA ratio of 2.07, which means that the company gets $2.07 in sales for each dollar in assets. Comparing this to the industry average of 1.81, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Watsco is well positioned from a sales growth perspective too. The company's sales are expected to grow 21.5% this year versus the industry average of 2.1%.
Promising Earnings Estimate Revisions
Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
The current-year earnings estimates for Watsco have been revising upward. The Zacks Consensus Estimate for the current year has surged 2% over the past month.
While the overall earnings estimate revisions have made Watsco a Zacks Rank #2 stock, it has earned itself a Growth Score of A based on a number of factors, including the ones discussed above.
This combination indicates that Watsco is a potential outperformer and a solid choice for growth investors.
Zacks’ Top Picks to Cash in on Artificial Intelligence
This world-changing technology is projected to generate $100s of billions by 2025. From self-driving cars to consumer data analysis, people are relying on machines more than we ever have before. Now is the time to capitalize on the 4th Industrial Revolution. Zacks’ urgent special report reveals 6 AI picks investors need to know about today.See 6 Artificial Intelligence Stocks With Extreme Upside Potential>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Watsco, Inc. (WSO): Free Stock Analysis Report
To read this article on Zacks.com click here.