Wesco: Lock In, Hold On and Prosper

Feb. 5.07 | About: WESCO International, (WCC)

There is one simple reason why Wesco (NYSE:WCC) will perform amazingly in 2007. Fundamental Divergence. Its a term you likely haven't heard before since, to the best of my knowledge I coined it.

Simply put, the earnings get better and better over a long period of time despite the price of the stock getting worse and worse. The fundamentals are divergent from the price.

Let's have a brief peek at this stock. From May 2005 to May 2006, this stock went from low 20's to 80 dollars per share. That's no small run-up. But then something odd happened. The stock started to go down in price. Now that's pretty normal for having had a run-up that big, but look at what the earnings were all the while.

In 2006, Wesco had year-over-year earnings increase of Q1 +288%, Q2 +95%, Q3 +128%, and Q4 +31%. And from May 2006 to Jan 2007, the stock went from 80 dollars per share to below 60 per share. A healthy consolidation is fine, but the stock was fundamentally building like a volcano while the price went down. What was and is going to happen?

On my own website I made the bold statement to buy this stock. I shamelessly recommended it to every person I talked to. Now this would either make me some friends or destroy my stock picking reputation. The result?

Feb.1 2007 had another earnings report that was okay, though not stellar. Now, I don't trade using price to earnings ratios, but sometimes a good stock will get so undervalued that it will actually offend stock traders everywhere. And that is what happened to WCC. Its p/e ratio dipped into the low teens and finally, begrudgingly investors returned to the table to buy more of this growing company. Only a few days past the earnings the stock has already moved up 10% in price - though still a long way off from previous highs. I say lock in, hold on and prosper with Wesco this year.

WCC 1-yr chart
WCC

Disclosure: Author is long WCC.