The One Housing Play Nobody is Talking About

by Andrew Zatlin

Surprise, surprise — the experts are wrong yet again… 

They don’t see the pain that’s coming for the housing market!

But I see it. And today, I’ll show you how to profit from it.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

The One Housing Play Nobody is Talking About

The housing market dominos have started to fall:

Mortgage rates have more than doubled over the past year. As a result, sale prices are down six percent since June 2022, as is sales volume. And in a sign of trouble ahead, new-home construction permits are down ten percent year-over-year.

Think it can’t get any worse? It sure can. In fact, you ain’t seen nothin’ yet…

Spring is Coming

Come springtime, we’ll see the real impact of higher mortgage rates:

We’ll see buyers walking away!

We’ll also see a sharp slowdown both in building homes and selling them. But therein lies our opportunity…

You see, the market is missing what’s going on here — including some key players who are poised to fall, and others who are poised to profit. Let’s take a look…

Picks and Shovels

My focus here is on “picks and shovels” opportunities — companies that provide tools or services an industry uses to produce products.

In the housing market, that means companies providing materials like lumber, screws, or nails. One of the biggest is Louisiana-Pacific (NYSE: LPX).

When the housing market soared during Covid, so did the price of lumber. And this lumber provider’s stock price skyrocketed, too:

Today, it’s still riding high. But the price of lumber has plummeted!

After rising to $1,500 in 2021, lumber prices are now back to where they were pre-Covid. This suggests LP’s revenues are going to slide. Yet its stock price hasn’t dropped much at all. Will that change soon?

Then there’s Fastenal (Nasdaq: FAST), which makes connectors for construction companies. Recently, this company hit the brakes on its hiring:

Hmm, if experts are forecasting only a slight dip in the housing market, why is this company’s hiring collapsing back to Covid levels?

I think it’s a sign that suppliers know there’s trouble ahead, and they’re preparing.

The thing is, they’re not the only ones…

More Signs Housing Is in Trouble

Real estate listing services like Trulia, Realtor.com, Redfin, and Zillow are pulling back, too. There simply isn’t as much demand for these services as before.

Two metrics I’m analyzing for these companies are:

  1. Revenue per employee: how much revenue does each employee create?
  2. Debt: how much debt does a company have on its books?

Take a look at this chart:

Redfin (Nasdaq: RDFN), for example, was generating almost $400,000 of revenue per employee last year. This year, that number is expected to fall to less than $200,000. (This company also hasn’t been profitable for four years. It’s carrying more than one billion dollars in debt. Yikes.)

Zillow (Nasdaq: ZG) is slightly better managed. It was kicking out sales of more than a million dollars per employee. Now that’s projected to fall to $320,000.

Next is Rocket (NYSE: RKT). This is the country’s top mortgage lender. It’s got a ton of debt on its books — eleven billion dollars’ worth — and a lot of employees. But it’s gone from nearly $250,000 per employee revenue to barely $170,000. Rocket’s in trouble.

The thing is, not every company on this list is floundering.

Apartments.com and Loopnet are owned by CoStar Group (Nasdaq: CSGP), a company you’ve probably never heard of.

Together, Apartments.com and Loopnet are sitting on nearly four billion dollars in cash, and kicking out half a million dollars per employee in revenue.

So, taking all this into account, what’s our strategy as investors?

My Winners and Losers

To start, I like CSGP. It’s in the rental space at a time when more people are renting, and its stock price is reasonable relative to its revenue growth.

On the flip side, I don’t like Louisiana Pacific. Sales are slowing down, but its stock price is still seventy-five percent above where it was pre-Covid. This company is overpriced.

Furthermore, stay away from Rocket. That eleven billion dollars in debt is going to cause some big problems.

Finally, there’s Redfin. This company is very poorly managed. It’s not going to survive for long on its own…

Which brings me to an idea so crazy, I can hardly believe I’m suggesting it…

Is This Idea Too Crazy?

Consider betting in favor of Redfin.

You see, Redfin is a juicy acquisition target. Realtor.com, Zillow, Trulia — someone’s going to scoop up this competitor.

This would be huge news. This company has a massive short position (twenty-six percent). Everyone’s betting against it. They think Redfin’s going belly up.

Me? I think a white knight will save the day, and that could cause a short squeeze. (This is when a stock’s price jumps higher, forcing those betting against the company to exit their positions by buying shares — thus sending its price up even higher.)

So if you’re feelin’ a little crazy, go ahead and back Redfin. It might just pay off.

In the meantime, we’re in it to win it. Zatlin out.

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In it to win it,
Andrew Zatlin
Andrew Zatlin
Moneyball Economics