Watsco Q3 drag hits Heartland Mid Cap Value Fund amid HVAC demand lull

Watsco, Inc. (NYSE: WSO) emerged as the largest performance detractor for the Heartland Mid Cap Value Fund during the third quarter of 2026, a result Heartland Advisors attributes to a temporary demand lull in the residential HVAC sector. The investment management firm disclosed this in its third-quarter investor letter, noting that the stock's underperformance weighed heavily on the fund's overall returns despite management's continued focus on fundamental research and balance sheet strength.

The fund itself declined 4.77% during the quarter, a drop driven primarily by negative contributions from the Technology and Health Care sectors. This performance lagged the broader market environment, where the Russell Midcap Index fell 1.98% while the S&P 500 gained 2.30%. Heartland Advisors noted that these market movements occurred as AI trade momentum faltered amid volatility in interest rates and oil prices. Despite these headwinds, the firm maintains that nearly $1 trillion in projected technology AI capital expenditures is expected to boost GDP by 3% and drive earnings growth in 2026.

Watsco, headquartered in Miami, Florida, operates as a leading distributor of air conditioning, heating, and refrigeration equipment. As of October 12, 2026, the company closed at $286.32 with a market capitalization of $11.82 billion. The stock has experienced a significant pullback of approximately 15.03% year-to-date, trading within a 52-week range of $277.34 to $459.00. In its letter, Heartland Advisors described Watsco as the largest wholesale distributor of HVAC and refrigeration equipment in the United States.

The fund manager cited a combination of factors creating the current industry demand lull, including declining new construction activity and weakening consumer financial conditions. Additionally, a refrigerant change implemented in 2025 caused a pull-forward of demand, further complicating near-term outlooks. Watsco and other major residential HVAC equipment manufacturers underperformed following disappointing second-quarter earnings results, which were characterized by persistent demand weakness and margin pressure linked to a lack of volume growth and tariff-induced cost volatility.

Hedge fund interest in Watsco has seen modest growth, with 40 portfolios holding the stock at the end of the second quarter compared to 34 in the previous quarter. While Heartland Advisors acknowledges the investment potential of Watsco, the firm suggests that certain AI stocks may offer greater upside potential with less downside risk relative to industrial distribution names currently facing cyclical headwinds.