There's always a reason why stocks trade near their all-time highs, usually because they are firing on all cylinders. That's certainly the case with Comfort Systems(NYSE: FIX), Watsco(NYSE: WSO), and nVent Electric(NYSE: NVT). All three have excellent tailwinds behind them, making them attractive stocks for investors who like to buy high and sell higher.
Comfort Systems
You can always find pockets of growth in an economy, even in the slowing one we have now. One such pocket is shown in the remarkable chart below. According to the Department of the Treasury, the spending boom is "principally driven by construction for computer, electronic, and electrical manufacturing," partly encouraged by the CHIPS Act.
U.S. Manufacturing Construction Spending data by YCharts
One way to make money from this trend comes from the mechanical and electrical contracting services company Comfort Systems. The company generates a third of its revenue from the manufacturing sector, with technology second at 21%. Given this exposure, it was no surprise to hear CEO Brian Lane say on the third-quarter earnings call in October, "Our revenue mix continues to trend toward data centers, life science, food and other manufacturing such as chip plants and battery."
Indeed, order strength led to the company's backlog rising to $4.3 billion at the end of the third quarter of 2023 compared to just $1.5 billion at the end of 2020.
If these trends continue, encouraged by ongoing demand for A.I. and semiconductor manufacturing in the U.S., then Comfort Systems' strong run can continue.
Watsco
The heating, ventilation, air conditioning, and refrigeration (HVACR) equipment and parts distributor is one of those boring stocks that quietly goes on, generating stellar returns for investors almost unseen. The stock is up 1,560% over the last 20 years and 315% over the last decade, and has paid a dividend for 50 consecutive years.
It's an impressive record due to management's "buy and build" strategy. In a nutshell, Watsco is the leading player in a highly fragmented market for HVACR distribution characterized by myriad small local players serving localized markets. Its strategy involves expanding geographically by acquiring small distributors and improving its performance by adding products and technologies to the acquired distributors' offerings.
There's even more benefit to the "buy and build" strategy as Watsco continues to roll out technological improvements such as e-commerce-enabled websites, mobile apps, and digitized product information -- solutions making it much easier for technicians to order products from distributors.
Last year marked a year of consolidation following 16% sales growth in 2022 and 24% in 2021, as high levels of replacement demand occurred due to stay-at-home measures leading to high levels of equipment usage. It's an impressive result, and Wall Street analysts expect 6.4% growth in 2024. As such, Watsco can continue its remarkable track record of delivering returns for investors.
nVent Electric
Alongside Comfort Systems and Watsco, nVent is another "boring" company that happens to deliver significant returns for investors. The electrical connection and protection product company's stock is up 135% over the last five years, driven by the electrification of everything trend.
The trend encompasses everything from AI and increasing demand for data centers and networks to electric vehicles and renewable energy driving demand for electrical installations. Industrial automation, smart buildings/infrastructure, and connected technologies require electrical installations, which means more demand for nVent's enclosures, fastening solutions, and heat tracing systems.
Led by an all-female CEO/CFO team, the company has attracted attention for its consistent record of beating and raising guidance. Management believes it's on track for organic growth of 3%-5% in 2024, with adjusted earnings per share up 4%-7% to hit a range of $3.17-$3.27. That may seem unimpressive, but consider that there's a headwind of $0.11 built into its guidance due to a change in tax standards. Without that, nVent would be heading for 7%-10% growth.
The electrification of everything trend is still in its early innings, and investors in nVent can expect many more years of growth from a company with an excellent track record of success.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy.
