With substantial "cooling” of the housing market and excessive “inventory overhang” the focus now shifts to internet companies that facilitate commercial and housing property sales. These internet and technology companies servicing the real estate sector will benefit from any recovery in the homebuilding sector. One such example is LoopNet (NASDAQ:LOOP).
While it is anybody’s guess when exactly we will see a full blown recovery in the housing market, certain analysts have stuck their necks out by suggesting that the sector has bottomed and investors better step in now if they wish to harness gains as the housing sector’s stocks begin their upward climb.
In a research note circulated by Citigroup(NASDAQ:CG) analyst Stephen Kim, on December 6, 2006, target prices were raised across the board for homebuilding stocks. Kim reasoned that this sector rallies ahead of fundamentals. Citigroup reiterated BUY rating for homebuilders with expected returns of about 67% by 2007 year-end.
Earlier in the month, “one of the biggest bears,” Daniel Oppenheim from Bank of America (NYSE:BAC), had upgraded homebuilders from negative to neutral.
The Mortgage Bankers Association [MBA] reported that mortgage applications increased at their highest since October 2005. Applications for loans to purchase a new home are at their highest level since January 2006.
With the soft landing of the US economy becoming a more likely scenario, technology plays servicing the housing market have become attractive with their relative under-valuation.
Loopnet (LOOP) stock
• Over the past week, LOOP experienced increasing share prices alongside increasing volumes.
• With relative under valuation for LOOP, in the mid-term one expects an increase in stock price.
• Short sellers have also come under near term pressure with the recent increase in share price.
1. LOOP listed 6 million shares on June 6, 2006 at a price per share of $12 on NASDAQ.
2. On December 12, 2006, the stock closed up 16.66% at $14 from its listing price.
3. Lock up period expired on December 3, 2006.
LOOP 6-mo chart
LOOP needn’t concern itself with the homebuilding slowdown. The commercial real estate sector this far has been impervious to the factors that brought on the homebuilders’ woes. Au contraire, any expected up tick in residential real estate market bodes well for commercial real estate, a segment on which Loopnet maintains primary focus.
With few direct competitors, such as the CoStar Group (NASDAQ:CSGP) and Xceligent, in the commercial real estate listings and transactions space, LOOP is well placed to capitalize from the growth that will ensue from the US “soft landing”.
Companies in the residential real estate listings group include Zillow, Realogy Corporation (NYSE:H),
IAC/InterActiveCorp (IACI), Move Inc. (NASDAQ:MOVE), HouseValues, Inc. (SOLD), and ZipRealty, Inc. (NASDAQ:ZIPR), which must duke it out to gain footprint and consumer mindshare, while simultaneously praying that the housing sector has bottomed.
A scan of LOOP’s financials reveals solid “Growth” play alongside “Value” waiting to be unlocked. LOOP delivered two positive earnings surprise of approximately 20% in the previous two quarters ended, 9/2006 and 6/2006. The pull back in LOOP stock price in November makes for an attractive entry point.
An area of concern was the 10% decline in EPS growth in the 3rd Quarter compared to the same Quarter from 2005. The downward pressure in EPS growth needs to be watched alongside unique visitors growth rate, listings growth, membership conversions from basic to premium, as well as premium membership cancellation rate to fully interpret long-term potential for the company.
Alexa Rankings of leading real estate websites
Alexa data on traffic ranking provides a proxy for user growth for the three commercial listing services vortal. Alexa calculates traffic rank as the geometric mean of the number of users that visit a website and the associated "page views". "Reach" measures the number of users with an Alexa toolbar that visit a website. The lower one’s "traffic rank", the better. For example, Yahoo’s (NASDAQ:YHOO) traffic rank is 1. The higher one’s "reach per million" and "page views", the better. For example, Yahoo’s reach is 279,700 and page views are 17.
LOOP’s Alexa metrics are far superior to both CSGP and Xceligent, underscoring the strength and continued growth of Loopnet’s internet commercial real estate platform. The fast growth of Zillow, both in reach and traffic rank, reiterates the importance of internet and technology companies that are redefining the ways in which both consumers interface and the real estate brokers approach real estate and commercial property listings and sales.
As markets trade thin ahead of holidays, this is a good time to build a position. Provided no economic shocks disrupt the macroeconomic momentum propelling United States towards a soft landing in general, and the home building sector recovery in particular, LOOP’s stock is far from fully priced.
We can expect LOOP stock price to appreciate by approximately 50% over the next 6-9 months.
Disclosure: Author is long LOOP since December 2006.