Watsco Stock is Cooling Down After Red-Hot Run Higher

What investors should know WSO stock before buying

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Watsco, Inc. (NYSE:WSO) is the largest distributor of air conditioning, heating, and refrigeration equipment, as well as related parts and supplies, in the United States. Watsco also operates in Canada, Mexico, and Puerto Rico, and is on an export basis to Latin America and the Caribbean. This afternoon, WSO was last  seen up 2.7% at $294.54.

On July 1, Watsco declared a regular quarterly cash dividend of $1.95 payable on July 30 to shareholders of record at the close of business on July 15. WSO currently has a forward dividend of $7.80 and a dividend yield of 2.70%. Watsco has paid dividends for 47 consecutive years.

Watsco stock has increased 61% year-over-year when it hit a bottom of $182.36 in July of 2020. Additionally, shares of Watsco stock have grown by 30% year-to-date but is down by 7% since reaching its record high of $307.81 in May.

WSO is expected to report earnings on Wednesday, July 21. Watsco has outperformed earnings expectations on all four of its most earnings reports. For Q2 of 2020, Watsco beat analyst estimates by a margin of $0.38 and reported an EPS of $2.26. For Q3 of 2020, WSO's earnings increased to $2.76 per share and beat expectations by a margin of $0.28. For Q4 of 2020, Watsco posted a decrease in earnings, dropping to $1.14 per share, but still beat estimates by a margin of $0.15. For Q1 of 2021, WSO reported an EPS of $1.39 and beat expectations by a margin of $0.50.

From a fundamental perspective, the biggest issue with Watsco stock lies in its valuation. WSO has an inflated price-earnings ratio of 38.46, and its forward price-earnings ratio of 33.78 is not enough of an improvement. On a positive note, Watsco has experienced consistent revenue and net income growth over the past few years. Overall, investors may want to hold of until a better buying opportunity presents itself for higher growth potential and a more attractive dividend yield.

Plus, the majority of analysts covering WSO are pessimistic. This is per the seven of eight coverage brokerages that sport a tepid "hold" or "strong sell" recommendation. 

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