1 Super Stock down 92% to buy Hand Over Fist before September

Redfin (NASDAQ: RDFN) is a real estate technology company and operates one of America’s largest brokerages. The rapid rise in interest rates in 2022 and 2023 has reduced the borrowing capacity of most consumers and put the brakes on the housing market, which has crushed Redfin’s core business.

That said, the company continues to generate modest revenue growth. He is using this tough period to cut costs and adapt his business, which has significantly improved his bottom line.

That hasn’t stopped the slide in Redfin shares, which are now trading 92% below their all-time high. It’s at a very low valuation based on a widely used measure, and the US Federal Reserve is expected to cut interest rates in September, so this could be a golden buying opportunity for investors.

Redfin is making the most of a difficult situation

Redfin’s biggest source of revenue was RedfinNow, an iBuying operation that bought homes directly from willing sellers and tried to flip them for a profit. The company closed the segment in 2022 to avoid losses in housing stock as interest rates rose. Redfin is now focusing on its portfolio of services, which include brokerage, mortgage and closing services.

In the latest second quarter of 2024 (ended June 30), Redfin and its 1,719 principal agents accounted for 0.77% of all US home sales, up from 0.75% in the year-ago period follow. The company also achieved a mortgage rate of 28%, which is the proportion of customers who used Redfin to buy and finance their home.

Redfin designed its business model to sell a high volume of homes and build market share. It charges an attractive listing fee of just 1.5%, which is much lower than the typical 2.5% fee in the rest of the industry. Additionally, repeat customers are charged just 1%, and the company said they accounted for 37% of all sales in Q2.

Redfin’s revenue in the second quarter was $295.2 million, which was a 7% increase from the year-ago quarter. This was a great result given existing US home sales he refused during the same period, which is further evidence of Redfin’s growing market share. Additionally, the company broke even on an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) basis, which was a significant improvement over the $6.9 million EBITDA loss it reported generated it in the quarter a year ago.

Redfin improved profitability by cutting costs. The company launched Redfin Next earlier this year, which is an opt-in program for agents who want to receive higher commissions in exchange for giving up their salary. This can remove fixed employee expenses from Redfin’s books and allow the company to hire more agents to increase its market share at virtually no upfront cost. The Next program will be available to all agents in the company next year.

The story continues

The Fed could cut interest rates three times before the end of 2024

Higher interest rates have crushed the housing market. I mentioned earlier the slowdown in existing home sales in the US, but now I want to emphasize the magnitude. Existing home sales came in at 3.89 million annualized units in June (the most recent number), which was down 41% from the recent peak of 6.6 million annualized units in 2021.

Consumer Price Index (CPI) inflation hit a 40-year high of 8% in 2022. That’s why the Fed aggressively raised the federal funds rate from an all-time low of 0.25% to 5.50% in a range of only 5.50%. 16 months (between March 2022 and July 2023).

However, the latest data shows that the CPI has eased to 3% and is clearly trending towards the Fed’s 2% target. As a result, experts predict that interest rate cuts are imminent. Actually according CME GroupFedWatch’s tool, there could be as many as three cuts before the end of 2024 (in September, November and December).

This will help the real estate market in two ways:

1. It will increase the borrowing capacity of consumers, which will give them more purchasing power.

2. It incentivizes existing owners who are keen to sell but don’t want to give up their current low fixed rate. This could generate more listings and increase housing supply.

Both of these factors will lead to more real estate transactions, which is great for Redfin’s business.

Redfin stock is trading at a very low valuation

The price-to-sales (P/S) ratio is a popular way to evaluate companies that do not have consistent earnings (profits). It is calculated by dividing a company’s market capitalization by its annual revenue.

Redfin has a market cap of $901 million at the time of writing, so based on its trailing 12-month revenue of $1 billion, its stock is trading at a P/S ratio of less than 0 ,9. In other words, investors are valuing Redfin at less than a single year of its revenue, which is practically the lowest.

For context, that’s substantially below Redfin’s peak P/S ratio of nearly 10 since 2021, and it’s also below its average P/S ratio of 2.6 since 2017, when the company first went public.

In my opinion, the suppressed rating may be unwarranted given that Redfin’s business is improving on most metrics. Additionally, the company has a stable cash position of $201 million on hand, with an additional $208 million in loans (mortgages) that it plans to sell. With it expected to break even on an adjusted EBITDA basis this year, it’s unlikely to surprise investors with a request for fresh capital through a capital raise in the near future.

That could represent an opportunity for investors. The FedWatch tool predicts a 100% chance of a rate cut in September, so it might be a good idea to buy Redfin stock before then with the intention of holding out for the long haul to capture the housing market recovery.

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Anthony Di Pizio has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends CME Group and recommends the following options: August 2024 $11 short calls on Redfin. The Motley Fool has a disclosure policy.

1 Super Stock Down 92% to Buy Hand Over Fist Before September was originally published by The Motley Fool