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TheStreet Open House

Bill Gunderson's Radio Play of the Day: Watsco

Stocks in this article: WSO

Let's begin with the construction and housing sector:

Data from Best Stocks Now App

Small-cap equities are still my No. 1 asset class. And the building and construction sector has been at, or near, the top of my sector rankings for almost a year.

Data from Best Stocks Now App

As you can see, Miami-based Watsco is a small-cap in the one of the best sectors right now. Watsco is an uncomplicated company. It distributes air conditioning, heating and refrigeration products for the replacement and homebuilding markets. Watsco passes my performance test:

Data from Best Stocks Now App

As you can see, the stock has outperformed the market by a wide margin over one, three, five and 10 years. It rose 9.2% in 2008, when the market tumbled 39%! When I compare the performance of Watsco to the 3,200 stocks that I follow, it scores a high-performance grade.

My second test is valuation. Performance and momentum is one thing, but valuation is also a critical piece to the puzzle:

Data from Best Stocks Now App

When I take next year's analyst's consensus EPS estimate of $4.31 per year and extrapolate it out by a 16.7% growth rate over the next five years, I establish an earnings estimate for five years from now. Of course, a lot can happen between now and then, but stocks trade on expectations. When expectations change, stock prices follow.

Furthermore, when I apply a multiple that I deem to be appropriate to that estimate, I establish a five-year price target that still is a great deal higher than the current price of the stock. The stock passes my valuation test.

My third test is visual. I never buy a stock without checking a one-year chart:

I don't buy stocks that are in downtrends -- sorry, Apple! I don't really like sideways trends either. Something needs to happen first. Is it going to break to the downside or the upside? I don't like to buy extended trend either. My favorite chart pattern is a fresh, new breakout.

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