NEW YORK ( TheStreet) -- Sometimes the best stocks are found in the simplest of industries. While the Facebook ( FB) IPO had sex appeal, and we anxiously await the upcoming Twitter offering, basic companies that provide basic services are delivering outsized returns to investors. An example is Watsco ( WSO), which I featured on my radio show Monday. I have written many times about the rebound in housing -- it's happening right now. I'm not a "Johnny come lately" to this booming sector. I started investing in housing during the summer of 2012 after I interviewed a well-known homebuilding CEO from the Southern California area on my radio show. I was shocked to hear him declare emphatically: "Yes, this recovery is for real." He went on to say: "In fact, in many markets there is a shortage of skilled labor!" I could not believe my ears. But, then again, fueled by 100-year-low interest rates, I was seeing the charts of a wide range of building-related stocks begin to take off. I wrote about Home Depot ( HD) in August, when I added it to my conservative growth model portfolio. The stock is up about 25% since then. I wrote another article in October about how the building sector was hotter than any other. I singled out housing mutual funds, exchange traded funds and individual stocks I liked at the time. At the time, I wrote about Minnesota-based Toro ( TTC). I still own Toro in my aggressive growth model portfolio as the stock continues to hit new highs. It's up almost 25% since I bought it. In November, everyone was clamoring about how cheap Apple ( AAPL) was. The problem was that Apple lacked the other two characteristics I require: performance and a healthy stock chart. Instead, I wrote about another housing-related stock called Ocwen Financial ( OCN) because it met all three criteria. Ocwen is up over 60% since becoming a member of my aggressive growth model portfolio. I currently own 26 stocks in the portfolio, which is up 11% this year, after fees and expenses, as of last Friday. Today I'm going to focus on Watsco.
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.
I send out several tweets daily on as many of those that I can find. Follow me @billgunderson. Watsco is in a healthy uptrend, and it possesses the other two criteria that I demand: performance and value. When I compare Watsco to all of the other stocks that I follow, it ranks No. 35 overall and earns a Gunderson Grade of "A." As always, there are no guarantees in the stock market. Even though I am long this stock, it is also part of a well-diversified portfolio that is managed every day.
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