Wall Street is Dead Wrong about Zillow (Z)

Mar 21, 2021

I am all about trends. Specifically, consumer trends.

What I’m seeing in LikeFolio’s data right now is a massive consumer shift like no other.

And I’m predicting that this emerging trend will dramatically impact portfolios this summer… and last for a decade or more.

My cofounder, Landon, and I call it The Urban Exodus.

In fact, we just sat down with TradeSmith CEO Keith Kaplan to discuss this powerful trend in depth — including the stocks that are set to win big (and some that will lose big!) — as a result.

In today’s Weekend Spotlight email, I thought I would pull back the curtain a little bit on one of the opportunities we see developing off of this Urban Exodus MegaTrend.

Leaving the city isn’t new — but some of the reasons are.

The basis of the Urban Exodus MegaTrend is that people are moving out of urban centers to suburban and rural locations at an increasingly fast pace.

Reasons given for wanting to leave the city aren’t difficult to guess:

  • Crime
  • COVID-19 (and its related restrictions)
  • Fatigue with urban lifestyle
  • Cost of Living
  • Ability to work from home

Those last two are the most interesting to me, because we can clearly see that they’re fast becoming permanent fixtures of American life, even in a post-COVID world.

“Why live in an expensive and burdensome city when I can make the same money working from home in a quiet neighborhood with space?” is a prevailing sentiment.

Data from the Federal Reserve confirms this thesis, showing that an already-interesting uptrend in out-migration from urban areas was dramatically accelerated in 2020:

To be clear, we don’t think the pace of this trend will sustain 2020 levels. But what we’re seeing in our consumer insights data strongly suggests that the events of 2020 were very likely the tipping point for a consumer trend that was already in place.

Bottom line: The Urban Exodus got a kickstart in 2020, and won’t be going away for a long, long time.

And there are tons of investment opportunities for us to capitalize on this.

People moving = Money moving

One of the many big stock opportunities we discussed with Keith is sitting right in the crosshairs of several consumer MegaTrends.

By making it easy for buyers to shop for a new home from the comfort of their couch (and without a mask on!), Zillow (Z) has turned itself into a “table stakes” player in the real estate market.

Just look at the consumer demand levels (green line) in the chart below, as they have spiked dramatically higher over the past 12 months:

Clearly, LikeFolio’s consumer demand data was incredible at spotting this surge in demand for Zillow’s services — far before Wall Street figured it out.

In fact, you can see how that spike in the green line (Likefolio consumer demand) generated a significant lead time prior to the spike of the gray line (stock price) — giving individuals a huge opportunity to get into Zillow stock way before the stock gained more than 300% in value.

But I want you to take another look at that chart — and pay close attention to what is going on now.

Yes, demand has pulled back from its peak last summer, but this is expected in a seasonal business like residential real estate.

What’s shocking here is how much higher consumer demand levels have been during this past winter’s “valley” — even when compared with the biggest “peaks” of years past!

This tells me that Zillow has done a phenomenal job of turning the opportunity of 2020 into long-term loyalty moving forward.

Playing Zillow from here

Zillow peaked about a month ago at $208/share, and has pulled back more than 33% since.

One reason for the decline is an overall pullback in tech stocks, which is understandable given how expensive many in the sector had gotten.

But another reason that Zillow is off its highs is that Wall Street has decided that the “reopening” of America will put a damper on home buying and consumer demand for Zillow’s services.

As I laid out before, I think Wall Street has this dead wrong.

In fact, it reminds me of an extremely similar play we had one year ago, when we were able to recommend another real estate company, Redfin (RDFN), to our members:

Like now, Wall Street was throwing RDFN out with the bathwater last year, and analysts had decided that COVID would devastate demand for residential real estate.

And, like now, we used our powerful consumer insights engine to tell Wall Street they were wrong.

The result?

+377% profit in under 12 months as investors finally figured out what LikeFolio data told us right from the start.

In fact, that RDFN trade was one of 13 recommendations we made in our MegaTrends COVID report last year… and each one of them has surged higher.

Including +377% for RDFN, +298% for TTD, +119% for CHWY, and +298% for ROKU… all in less than 12 months!

Andy Swan,
Founder, LikeFolio