This real estate stock that’s down more than 50%
The CEO of Ritholtz Wealth Management stated that he started a position in Zillow because he believes in the company’s long-term ability to capitalize on the growing digitization of real estate services. The investor is particularly optimistic about Zillow’s ability to expand its so-called iBuying platform, known as Zillow Offers.
Still, Zillow shares may have more room to fall in the near term, according to Brown. Friday’s intraday trading price was just below $95 per share. This is a significant decrease from its peak on February 16, when it broke above $208. Zillow shares are down more than 27% year to date.
“I bought about a third of the total amount I’ll have. I don’t want to give the impression that I believe Zillow has reached rock bottom. I’ve been following this stock since it was $120. It is still a falling knife in a well-defined downtrend, but it is cheap enough for me at this point,” Brown said.
“Quite frankly, I believe it is one of the best web companies in the world, and I love the strategy that is transforming this company into it,” he added.
Zillow has benefited from the coronavirus pandemic’s red-hot housing market, which erupted last year. In 2020, the company’s total revenue increased by 22% year on year, and by 33% in the first six months of 2021.
Zillow Offers, the company’s house-flipping division, saw a 25% revenue increase in 2020 compared to 2019. Revenue from Zillow Offers increased by 20% through June 30 of this year.
Zillow Offers, which debuted in 2018 with just two geographic markets, moved the company beyond being an online real estate marketplace and into the business of buying homes directly from sellers. It is now available in 25 markets across the United States, from Tucson, Arizona, to Atlanta, Georgia, to Miami, Florida.
In 2019, Zillow co-founder and CEO Richard Barton said, “We dream one day of you having an almost trade-in experience with your house.”
Brown believes in Zillow’s ambitions.
“Everyone knows the real estate mania driven by the pandemic is not, like, a forever thing and will eventually go back to trend,” Brown said, explaining the stock’s steep drop this year. “If it falls further, I’ll buy more,” he added.
On a broader level, Brown believes Wall Street does not fully understand Zillow’s business. “It’s like nine companies rolled into one,” the investor explained.
“Zillow was basically selling leads to Realtors three years ago, and then they decided they wanted to get involved in the transactions themselves, so they’re doing the mortgage business, which is the ultimate no-brainer,” Brown explained. “But the bigger business, and I believe the business that will take over this entire company, is iBuying.”
Through its Offers segment, Zillow purchased approximately 3,800 homes in the second quarter of this year. According to a FactSet transcript, CEO Barton stated on the company’s earnings call that it sold just over 2,000 homes.
“That business has the potential to be explosive, given how much people despise the home-buying process,” Brown said. “They are not the only ones doing it, but they are the most prominent. I believe they will be the best, which is why I want to invest in the stock, despite the large drawdown and what I believe is a misunderstanding.”
Melvin Capital reopens trades
According to regulatory filings and InsiderScore.com, Gabe Plotkin’s hedge fund increased its bet on Expedia by 22% to more than $1 billion at the end of June, making it the most bullish holding.
The travel booking company is reviving its operations after the pandemic caused one of the most difficult years in the travel industry’s history. Expedia announced earlier this year that it will be updating its app and websites to focus more on collaborating with customers on their trips.
Melvin Capital also had a large stake in Texas Roadhouse, valued at $378 million at the end of the second quarter. Restaurant stocks are another popular way to bet on the economy’s rebirth. Texas Roadhouse stock is up about 14 percent year to date.
In January, the hedge fund suffered a more than 50% loss in a single month after its short bet on GameStop was targeted by an army of retail investors who organized against short sellers in online chat rooms. Melvin was hurt by a massive short squeeze at GameStop, which received billions of dollars in emergency funds from Citadel and Point72 to shore up its finances.
Melvin closed its short position at the end of January, and the fund returned more than 20% in February.
As of the end of the second quarter, the hedge fund held significant positions in several megacap technology companies, including Amazon and Alphabet. Snowflake and Align Technology were two other technology stocks in which it had significant holdings.
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RBC downgrades utility Duke Energy
Analyst Shelby Tucker downgraded the stock from outperform to sector perform in a note to clients on Friday, citing downside risk following a recent hot streak.
“While we see potential upside in DUK’s stock,” the note said, “we believe the overall risk/return profile warrants increased caution.”
This year, Duke shares have gained more than 16 percent, easily outpacing the Utilities Select Sector SPDR Fund. Since the end of June, the stock has increased by more than 8%. RBC’s price target of $109 per share is about 2% higher than the stock’s closing price on Thursday.
A bill currently in the North Carolina state legislature that could change the rules around regulatory oversight and the mix of energy sources as the state moves toward renewables could be a key catalyst for Duke Energy.
The bill is seen as a positive development for Duke, but RBC believes that passage without concessions from the utility is unlikely.
“In its current form, the bill has not moved as far to the center as we would have expected. Obtaining approval from Governor Cooper will most likely be a major challenge, and we do not anticipate enough legislative support to override a veto from the Governor,” the note stated.
The bill has already passed the state House of Representatives and is now in the state Senate.