The U.S. inflation rate slowed in May to 3.3% annually which was lower than expected. Here is what the BLS said:
“The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today.
Over the last 12 months, the all items index increased 3.3 percent before seasonal adjustment. More than offsetting a decline in gasoline, the index for shelter rose in May, up 0.4 percent for the fourth consecutive month.
Indexes that increased in May include shelter, medical care, used cars and trucks, and education. The indexes for airline fares, new vehicles, communication, recreation, and apparel were among those that decreased over the month.”
Here’s your taxpayer-funded government chart showing inflation trending down:
Why You Should Care
This surprise drop in inflation coupled with a slowing jobs number means that the Fed’s high interest rate is working to bring down the rate of inflation. This means the Fed has room to cut interest rates sooner rather than later – likely before the election rather than after.
In response, the stock market went up and some stocks went up more than others. Many stocks that made big jumps today were related to housing.
Here are a few:
Zillow (Z) up 12%
Redfin (RDFN) up 11%
TopBuild Corp (BLD) up 8%
Walker & Dunlop, Inc. (WD) up 8.2%
Rocket Companies (RKT) up 7.5% (full disclosure: I own RKT).
A Seachange
Today could be a turning point in housing stocks if the Fed cuts rates and house sales volume surges. These realtor stocks have been beaten down over the past three years and if they start to gain traction they will run like a bat out of hell.
Some of them are true value stocks. Others are growth stocks that stopped growing and saw share prices get killed.
As smart investors, we should start to dig through these types of companies, looking for bargains because this is where the next big leg up will likely come from.
Let’s look at Redfin versus Zillow because they had the biggest jump today and they are in the same type of business, so it’s apples to apples in a way.
Here is the four-year chart. The yellow is Redfin. The candlestick is Zillow.
Zillow has outperformed Redfin over the past four years, or I should say has sold off less. That big runup in 2021 was due to people fleeing the cities and buying houses due to Covid-19. The subsequent fall was due to the effective monthly payment doubling on the same house.
High interest rates and high house prices have caused stagnation in the housing market. The theory is that low interest rates will lower the monthly payment which in turn will kick start sales due to the massive pent-up demand of millennials who have entered their prime nesting age (29-35 years old).
Realtors and listing services will return to Covid growth and all will be right with the world.
So, which would you rather own? Zilliow is more than ten times the size of Redfin with a market cap of 11 billion and a share price of $47.85. Redfin is worth $823 million and has a share price of $6.82.
Redfin trades at 0.83 times sales with -$136 million in income, has $115 million in cash, and over $900 million in debt. Revenue growth was 5% last quarter.
Zillow trades at $5.07 times sales with an income of -$159 million, $3 billion in cash, and $1.85 billion in debt. Revenue growth was 12% last quarter.
Zillow is the better bet here. They are larger, have far less debt, a lot more cash, better brand recognition, and faster growth. You can argue that they are more expensive relative to sales but in a new environment sales numbers will change quickly.
You could also argue that the end of realtors’ monopoly on the 6% commission destroys Redfin’s business plan. That said, both of these stocks are probably heading much higher over the next two years. My bet is that Zillow goes up more.
All the best,
Christian DeHaemer
Outsider Club
Outsiderclub.com
WSJ on Inflation: https://www.wsj.com/economy/central-banking/cpi-report-fed-meeting-interest-rate-ef93c8b0?mod=latest_headlines
Brit on new power grid: https://www.outsiderclub.com/us-regulatory-clusterfck/
Half of the job listings are BS, aka “Ghost Jobs”: https://www.theepochtimes.com/article/why-nearly-half-of-us-online-job-postings-are-fake-5661146?src_src=Morningbrief&src_cmp=mb-2024-06-12&est=AAAAAAAAAAAAAAAAbOM5fl0YyNHb77waqkVeBrVzxw0NKCTH%2FjETkk7H7AEInIY8vs33
