- Z has risen too high based on a violent short squeeze.
- While Z is a good short candidate on its own, the safer trade is short Z, long MOVE.
- MOVE has better valuation relative to Z.
- I believe MOVE's prospects are under-estimated by the market.
- Insider selling corroborates the pair trade thesis.
During the past month or so, Zillow (NASDAQ:Z) has rocketed to new highs.
The original turnaround came with better than consensus earnings on May 7th, but the move has been exaggerated by a violent short squeeze thereafter. Jim Cramer noted it on May 23rd:
Moreover, there were an increasing number of shares short into the squeeze, see the Nasdaq data below:
When trying to take advantage of price overshoots generated by short squeezes, it's better to enter later than earlier; but by this point the force of the squeeze seems to have dissipated, and yet the "artificially" high price remains. On its own, this might indicate a potentially good short entry, particularly given the company's stratospheric valuation, but the safer play in my opinion is a pair trade with equal dollars short Z and long Move (NASDAQ:MOVE) (a company which operates the realtor.com site among others).
While Zillow is probably the currently best-known site for internet real-estate data, three factors argue for the pair trade: relative valuations, long-term competitive advantages and insider selling. To put this another way, currently the market has awarded Z a long-term victory in the market, and has therefore bid the price up on every valuation measure, but there's a real question as to whether or not that victory has been declared prematurely. And any inferences we can make from insider selling corroborate this conclusion.
The first point regarding relative valuations is best understood from graphical presentations, so here are charts comparing the two companies on key valuation parameters:
By every measure MOVE is clearly the better value buy than Z.
But the second reason to consummate the pair trade is that MOVE is slowly and more adroitly seeking to compete with Z. For the past few years, I have heard ample anecdotal evidence from people who were actually looking to buy, sell or rent a home, that the realtor.com site has much more current and accurate listings than does Z -- and hence is much more useful. On the other hand, for looky-loos just window shopping, or trying to feel good about how much their home has appreciated on the zestimate scale, Zillow is the go-to site. My guess is that the former types of users can be monetized much more readily than the latter, and it would appear that MOVE has (finally) come to the same conclusion. Hence an ad campaign stressing listing accuracy. See this clip for instance. I believe that as word gets out, the realtor.com site will see higher traffic increases than Z, and as a result MOVE will begin to eat into the valuation disparity (both absolutely, and on a multiple expansion/contraction basis).
Finally, insiders at Z and MOVE have different attitudes towards their companies, with the former selling at a desperate clip:
Given the valuation differences, my belief that MOVE's prospects relative to Z are underestimated and confirmation from insider selling, I have put on a pair trade short Z and long MOVE (though I have more dollars short Z than long MOVE). I may add to MOVE in the next 72 hours to better balance the two. I will look to unwind the trade as the relative valuations (P/B, P/S etc.) become roughly commensurate.
For reference, here is the relative one-year price appreciation of the two stocks:
Additional disclosure: I am short Z and long MOVE, though by dollar size my Z short is larger than my MOVE long. I may add to MOVE in the next 72 hours to better balance the positions