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A Cold Day in Hell! – Watsco Stock Meets its Maker. (WSO)

Posted on May 31, 2021

Watsco (NYSE:WSO) is in the business of cooling and heating apartments, houses and commercial buildings – and refrigerating nearly any size room you need to chill.

That’s right, Shane.

Watsco’s stock is also about as hot as it gets right now.

Yet we’ve a feeling she’s headed for the deep freeze.

Why?

Take a look at the fundamentals –

  • P/E is a ripe 38.24,
  • Dividend is a healthy 2.68%, while
  • Price to Book is an outlandish 6.87.

We’ve also got a notion that post-Batflu sales on home-office upgrades won’t be as HEALTHY as they’ve been over the last few quarters.

Stepping Stones, Head Stones – it’s all the same.

Not that the company’s going to roll over and die.

Rather, their growth strategy may be reaching a tipping point here, after which they’ll have to make a major turn toward debt financing to acquire the regional mom and pop HVAC outfits that have driven their growth model to date.

And even though that could prove successful, the share price may still suffer.

The company currently carries little debt and could certainly service short- and long-term financings with current cash flow.  But again, stock price has little to do with economic realities.

As the daily chart shows, enthusiasm for the company’s shares is now a tad overdone.

See here –

Technically, WSO started looking weak back in late April, when –

  1. An overbought RSI read (circled, in red) triggered
  2. Negative divergence from both RSI and MACD indicators (in green), a sign that buying momentum was waning.
  3. Since then, RSI has gone sub-waterline (temporarily) while MACD is fast headed in that direction.  Should they both cross below that threshold, we’ll likely see significant technical selling.
  4. We note that RSI’s first dip below that all-important mid-way marker coincided with a break below a ten week rising wedge (in red, at top), and that now
  5. Price is barely holding the short term moving average – while tracing another rising wedge formation (in blue).  Rising wedges, by the way, are always bearish.
  6. It appears there’s no further support until 255, though simple Fibonacci retracement calculations (in purple) speak to a decline to 240 and then possibly 200, where a large gap also requires filling (in black).

All told, it doesn’t look promising, and we’re betting on a fall of some 15% (at least) to the 240 range.

And we’re playing it like this –

A Jew and His Money recommends you consider selling the WSO August 20th 240 PUT for $1.55 and buying the WSO November 19th 240 PUT for $5.60.   Total debit on the trade is $4.05.

Rationale: Our best estimate is for WSO to decline to the 240 range by August expiry, at which point we expect to cash out both options, the August expiry with almost no time value, and the November with a full three months to go.

That should produce a hefty bounty should there be lots of implied volatility in the options at that hour, as we fully expect.

At most brokerages, this trade requires NO margin.

Maximum gain on the trade is indeterminable, as there are too many moving parts (including, most formidably, the above mentioned IV).

Maximum loss is limited to our initial debit.

Breakeven is likewise impossible to determine with a calendar spread.

Only the Holy One, Blessed Be He, can know.

And that’s why we pray to him.

With kind regards,

Hugh L. O’Haynew

 

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