A New Furnace, A New Stock: ACR Group (ACRG, KSWW, LII)

Includes: ACRG, KSWW, LII
by: Microcap Speculator

The Microcap Speculator submits: After a ton of research and a half dozen estimates, I replaced my furnace and air conditioner this month. In the process, I learned some information that might be useful in the stock market. It turns out that HVAC companies are having a banner quarter, thanks to the federal government. At the end of January 2006, U.S. Department of Energy regulations will require all air conditioners to have a seasonal energy efficiency rating (SEER) of 13, versus the 10 that is required today.

My informal survey indicates that the changeover will help HVAC firms in two ways. First, low end 10-12 SEER air conditioners are now commanding higher prices than usual. Second, in January, the sales of the higher SEER models will increase average replacement prices. Most of the contractors that quoted prices for me were asking about $600 more for a 13 SEER model than a 10-12 SEER model (this is for a 3.5 ton A/C unit -- the differential will be lower for smaller units and higher for larger units). A/C equipment manufacturer Lennox International (ticker: LII) stated in its third quarter report that "the movement to 13 SEER will be a net positive for our company and the industry."

While I continue to like KSW Group (ticker: KSWW.ob), the best microcap play to take advantage of this trend is probably ACR Group (ticker: ACRG.ob). Unlike KSW, ACR Group's business is spread pretty evenly between residential and commercial, replacement and new construction. Even better, ACR Group operates primarily in hot climates that will tend to have higher air conditioning requirements.

The chart also looks nice -- I expect the rounded bottom to hold. The only thing missing at this point is volume. A few strong volume days to the upside should signal a return to 52-week highs above $4.

I have no position in ACRG.OB. I am long KSWW.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

ACRG 1-Yr Chart