The S&P 500 is down nearly 0.7% in early afternoon trading Wednesday. This follows the index's 1.5% decline on Tuesday. The Dow had its biggest one-day decline since March. 

A chunk of the blame goes to the looming government shutdown. However, it doesn't help that bond yields were up, and consumer confidence was down for the second month in a row.

Investors aren’t feeling warm and fuzzy right now. Yesterday, I mentioned that stocks hitting 52-week lows were 12 times as plentiful as those hitting highs. Not surprisingly, the S&P 500 is down 6.1% in September. It’s truly living up to its reputation as the worst month of the year for stocks. 

Alas, there is some good news on this day. 

Of all the stocks with significant price changes to the upside, 31 are up 4% or more. Here are two that look like long-term buys. 

Watsco

Watsco (WSO) is the largest distributor of heating, ventilation, and air conditioning equipment in the U.S. Its stock is up precisely 4% and an impressive 45% in 2023. 

Too late to the party? It’s never too late to own a company that rules the HVAC market. A little thing called climate change makes it so.

In June, Watsco made it into the Fortune 500 for the first time. It was ranked 495th with 2022 revenues of $7.3 billion. The Fortune 500 is the 500 largest corporations in America by revenue in the latest fiscal year. 

The company got into the HVAC distribution business in 1989. Since then, its sales and operating income have grown by 15% and 19%, respectively, compounded annually. That’s enabled it to increase dividends by 21% annually. 

In 1989, it paid out $0.08 a share in dividends. In 2022, its annual rate was $7.35. In 2023, it will likely be at $10, possibly more.

The industry remains fragmented, so the opportunity to make acquisitions is alive and well. In early September, Watso announced it acquired Gateway Supply Company, a South Carolina-based HVAC distributor with 16 locations and $180 million in annual revenue. It is Watsco’s 68th acquisition since 1986. 

The runway for growth is there. 

I’d consider selling the Nov. 17 $360 put if you're into options. The $11.60 bid has an annualized yield of 22.2%. Business is solid right now. I can’t see it falling below $348.40 in the next 7.5 weeks. 

Procore Technologies

Procore Technologies (PCOR) is a provider of construction management software. I know this because my wife owns a small construction company that is growing rapidly. Software is a major requirement for her to keep up with everything that needs to get done.

Procore went public at $67 in May 2021. Like many IPOs, within 12-24 months after going public, you can buy PCOR stock for less than what it went public for. 

As I write this, it’s up 5.4% on the day and 39% year-to-date. 

So, what’s changed between now and then?

As of June 30, 2021, barely one month after it went public, it had Q2 2021 sales of $122.8 million. In Q2 2023, its sales were $229 million, 86% higher over two years. Its operating loss in 2021’s second quarter was $149.1 million, or 121% of its sales. In Q2 2023, its operating loss was $58.7 million, or 26% of sales. 

It’s exponentially in a better place. 

For example, at the end of Q2 2021, it had 11,149 customers. Two years later, it was 41% higher at 15,704. That’s an addition of approximately 569 per quarter. I’ll take that every day of the week and twice on Sundays. ‘

In 2023, Procore management expects revenue of at least $921 million with a non-GAAP operating margin of -4.0% to -4.5%. This suggests, at least on a non-GAAP basis, that it will generate an operating PROFIT in 2024. 

Based on its 2024 guidance, the company’s $8.8 billion market cap is 9.5x 2023 sales. At its height in July 2021, around $103, it was trading at 28.5x its 2021 sales of $515 million. 

Financially, it’s in a better place, but it trades for two-thirds less than in July 2021. In May 2022, it bottomed at around $43.50. It’s up 50% since. To me, that smells like an opportunity. 

From an options perspective, I like the idea of selling the Nov. 17 $60 put with a $2.05 bid. That’s also a 22% annualized yield like Watsco. The net price of $57.95 is also a good entry point should it fall below $60 and the shares are put to you. 

Of the two, I will always side with the more profitable business. There’s no question that it is Watsco. I also like the fact it’s an ongoing consolidation play. Its M&A strategy could last for decades. 

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