I May Have Been Wrong About Real Estate, but I Was Right About This Stock!

Nov 05, 2021

I’ll never forget how certain I was that real estate would tank last year.

I even told my wife we needed to sell our house immediately. And I told her “I’d rather be homeless than carry two homes!”

She told me I was nuts. But she went with the flow.

You see, we were under contract to buy a home later in 2020. But when we decided to buy the new home, there was no COVID-19 pandemic.

The housing market was doing great. The economy was great. The stock market was hitting all-time highs over and over.

And then I saw this chart:

I completely panicked.

We listed and sold our existing home on the same day in May 2020.

I thought I was the luckiest person alive.

But after being “homeless” for two months and moving from hotel to hotel, I learned the most valuable lesson ever.

Women are pretty much always right. Yep, I’ll publicly admit that my wife was right and we should have waited to sell our home.

If I had “TradeStops for Real Estate,” then I would have fared much better, but there are no easy stop losses on real estate.

Fast forward a bit.

In late September of this year, I went on camera with three of my colleagues from Stansberry Research: Steve Sjuggerud, Doc Eifrig, and Dan Ferris.

We had talked about doing a project together for a while. It was a true honor to be on stage with some of the biggest names in finance.

During that event, they asked me to share what I thought was “the most dangerous stock in the world.”

My answer was, I think, unexpected. By saying that my stock pick could go to zero, I was effectively betting against real estate!

Once I explained my reasoning, Steve agreed with my thesis, but I couldn’t convince Dan or Doc.

In fact, after the event, they both told me they wanted to buy the stock because they thought I was completely wrong.

The real estate market was the most inflated it could ever be.

And we all agreed that as consumers began to really care where and how they live, that shift was going to push the real estate market even higher.

With all that in mind, I don’t blame Dan or Doc for disagreeing with me. It’s extremely hard to bet against a stock like that. But that’s exactly what I did, telling everyone listening to avoid it — and sell it if they did own it.

But look at any chart showing Zillow’s (Z) price movement since the beginning of the year — and especially this week — and you can see that it’s absolutely tanking.

Zillow’s stock plummeted during the COVID crash, but then rebounded and seemed to not look back as a result of the home buying and selling frenzy. But as I said during the event, Zillow reached an all-time high of $199.90 in February.

At the time of this writing — not long after the company reported Q3 earnings — Zillow stock was down more than 67% to just $65.44.

It has been in the TradeSmith Red Zone for more than six months and in a downtrend for more than three months.

Fundamentally, its business model conflicts with itself, which is never a good thing. Let me explain.

Zillow’s original business model was basically online classified ads for real estate brokers.

The company garnered a huge amount of traffic from people who liked to dream, surfing the internet for potential homes. They monetized that traffic by charging real estate brokers to place listings on the site.

But in 2018, Zillow decided to compete directly against real estate brokers by purchasing homes itself via algorithms. This is known as iBuying or robo-buying, and really, it’s just another form of house flipping.

That model worked extremely well last year during shutdowns, but do you see the big problem? As a bulk buyer of homes, Zillow began to compete with the same real estate agents who advertise on Zillow, hurting itself on both sides of the table.

In even a modest real estate downturn, Zillow could get killed, not just by lost real estate agent revenue but a glut of unsold home inventory.

And if you’ve read any headlines this past week, you know that is exactly what has happened.

Zillow has long been known as the place to go when you’re looking to buy a new home. It’s famous for its Zestimate, which uses proprietary algorithms to estimate the current price of your house or your neighbor’s, if you’re feeling nosy.

The real estate markets are finally cooling off and the bad news is just getting started for Zillow. Everything points to the news getting worse, not better — spelling even further doom for Zillow.

Now, before you start wondering, I’m not here today to pat myself on the back. Money Talks exists so I can share with you my insights and lessons learned on investing.

So what’s the point?

My bet is that you’ve run into this type of situation before — and often. You may follow multiple newsletter analysts. You may follow the TradeSmith indicators or any number of other indicators to help inform your investing decisions.

The odds are next to zero that all those inputs will agree on most stocks — just like what happened in my conversation with Steve, Dan, and Doc.

In fact, you’re always going to be weighing multiple pieces of conflicting information. So what should you do when analysts or indicators that you follow disagree?

First, you have to look into what each piece of information actually means and weigh it against your own risk profile and investing philosophy. If you’re still not sure, recognize that it’s OK to walk away rather than try to profit. In fact, that’s exactly what I’d recommend — and what I did recommend with Zillow.

My view of Zillow based on the TradeSmith indicators and my analysis of the company’s business model was clearly bearish. So I could have suggested that listeners short the stock, or even sell puts against it. Either recommendation would have been hugely profitable.

But based on the info I had at hand, I had to make the safest bet. I saw the tidal wave coming, and knew the best decision was to walk away and get to higher ground.

My advice was to avoid the stock like the plague. And certainly, if you owned Zillow, my advice was to sell it.

Is that the best choice for every investor? Or even for every stock?

No.

It will vary. We need to pause, think deeply rather than react emotionally, and then always step aside if we’re too conflicted one way or the other.

One thing I urge you to do is look at the business model of any public company and our indicators at the same time.

Before you buy or sell a stock, you should know how that business makes money, how it’s expanding, and what products and services it sells.

Then use our tools (or any other indicators you follow, if you don’t subscribe to our tools) to determine if now is the right time to buy or sell that stock.

So, how do you approach conflicting opinions when it comes to managing your own portfolio? I’d love to hear about your philosophy on analyzing various kinds of input. As always, I cannot respond to every email, but I read them all.