Investment Science Denial - Revisiting My Farmer Mac Long And Zillow Short

Gary J. Gordon profile picture
Gary J. Gordon
2.33K Followers

Summary

  • I believe that Farmer Mac has a more than 100% upside and Zillow an 80% downside.
  • I use actual investment science to make my case.
  • Farmer Mac's news remains constructive while market and competitor trends are worrisome for Zillow.

This past July 17, I compared my favorite long idea, Farmer Mac (NYSE:AGM), to my favorite short idea, Redfin. Today I revisit that theme, with one adjustment – I replace Redfin (RDFN) with Zillow (Z), another stock I’ve suggested shorting, and which has pulled even with Redfin as my favorite short.

To date, I could not be more wrong in my long/short idea. Since July 17, Farmer Mac is up a mere 4%, while Redfin rose 30% and Zillow jumped a whopping 71%.

Admit defeat? Sorry, no. Now Redfin and Zillow have similar downsides in my view, of about 80%, and Farmer Mac should easily be a double. Let me explain.

Investment science.

There are lots of approaches to stock investing. Many are emotional, not scientific. Momentum investing, for example, which says that if the stock went up today, it should go up tomorrow. Or what I’ve called magical investing, which assumes that Stock X has found a business model that creates a moat which competitors forever can’t cross. If enough people buy the momentum/moat belief (note the word “belief”) then these investment approaches will work for some time period.

But investment science is built on the principle that we want to own slices of a business for a simple reason - because businesses can make money. Check out Shark Tank some time for proof. The more earnings the better, and the sooner those earnings are generated, the better. For example, the Corporate Finance Institute lists as the primary stock valuation tool the dividend discount model, which it defines as:

“A quantitative method of valuing a company’s stock price based on the assumption that the current fair price of a stock equals the sum of all of the company’s future dividends discounted back to their present value.”

Since nearly all

This article was written by

Gary J. Gordon profile picture
2.33K Followers
Gary Gordon’s career was on Wall Street, where he was a stock analyst covering the housing, mortgage and consumer finance industries. He also served as a U.S. investment strategist and as a portfolio manager. The bulk of his work career was at PaineWebber and UBS. He is now retired. Mr. Gordon is an adjunct professor at Mercy College in New York. He teaches economics on campus and math at prisons (Sing Sing and Taconic in New York). He also presents financial literacy seminars to adults and students. He is on the Board of Hudson Link (college education for incarcerated men and women) and the Baron de Hirsch Fund. Mr. Gordon is married with two young adult children. He has degrees from Colgate University (BA '74, philosophy) and The Wharton School (MBA '77, finance).

Disclosure: I am/we are long AGM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am short Zillow and Redfin

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