We took profits on our Zillow position on Friday after the company reported an impressive quarter of earnings, further signaling that Real Estate 2.0 has arrived.
Zillow is one of the most reliable performers during the first half of any year, bringing in an average gain of 50% during the first half of the year with remarkable consistency. This is a trend we noted in detail in the 2018 note below.
What follows is the 2018 note in its entirety. The same note can also be viewed by clicking here.
Zillow is a company that has some very defined seasonal characteristics.
It makes sense. Real estate is a highly cyclical industry not just from a broad macro perspective, but within any calendar year. Spring and summer are traditionally the busiest month for new residential real estate purchases. Zillow tracks these buying patterns almost perfectly.
The stock tracks not just the seasonal characteristics of real estate with uncanny consistency, but it also moves inverse to interest rates. The cost of borrowing to buy real estate as expressed through the ten year yield is just as important a consideration of when and where to buy the stock as the seasonal aspect.
On average, Zillow returns 50% during the first half of the year with remarkable consistency. The only time it has been down during the first half of the year was during 2015, a year when rates rose 7.6% from the beginning of the year through the end of Q2.
Here is a look at first half performance in each year since the stock went public with the ten year yield plotted (blue) to further demonstrate its negative correlation to rates.
Zillow 1st Half 2012 Return +71%
Zillow 1st Half 2013 Return +103%
Zillow 1st Half 2014 Return +75%
Zillow 1st Half 2015 Return -18.08%
Zillow 1st Half 2016 Return +41%
Zillow 1st Half 2017 Return +33%
Zillow 1st Half 2018 Return +47%
Zillow 1st Half 2019 Return +19% as of 3-15-2019
Further, the last time Zillow traded at a multiple of 6x revenues was 2016, a year that saw the stock return 41% during the first half of the year.
A combination of persistently lower rates, seasonably favorable factors and a relatively low valuation puts the company in a very attractive position with the recent pullback. $50 looks highly likely during Q2, which would put the stock within a frame of the average return of 50% for the 1st half of the year. Should interest rates persistently move lower in Q2, $60+ is not out of the question.
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