2 Real Estate Stocks Overdue for Upgrades

Both ZG and RDFN are sporting cheap options

Oct 9, 2020 at 10:46 AM
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    During the chaos that has been 2020, many sectors -- including the likes of general retailers, travel, and energy -- have suffered, while others have enjoyed a steadier run. Among the outperformers is the real estate sector and the infamous real estate investment trusts (REIT) stocks. In fact, in a study done by Schaeffer’s Senior Quantitative Analyst Rocky White that compares 62 REIT stocks, the sector overall is coming in at an average 45% above their 80-day trendline. And while the sector does share an average year-to-date return of -28.3%, two real estate names have managed to stand out as a "must-buy."

    Zillow Group Inc (NASDAQ:ZG) and Redfin Corp (NASDAQ:RDFN) have both seen steady, almost identical climbs higher from the mid-March, broader-market selloff, and now sport year--to-date gains of 134% and 147%, respectively. Below, we will dive into a wider look at each stock and analyze what the market climate looks like for two of the biggest names in the real estate industry for options traders.

    Starting with Zillow Group stock, the equity recently bounced off technical support at the $90-$93 levels. This area happens to coincide with its 100% year-to-date return mark and is five times its March closing low. The shares gapped higher by 11.6% the day after an early August earnings report, and –unlike the rest of the broad market -- have followed through with September gains, unlike its immediate selloff in February following a similar post-earnings bull gap.

    There's additional short-term support in place at ZG's 10-day moving average in the event of a pullback. Plus, tailwinds could come from a shift in analyst sentiment, considering 12 of 23 in coverage dole out "hold" or worse rating on the security.

    Options seems like an affordable way to go at the moment. ZG’s Schaeffer's Volatility Index (SVI) of 52% stands in the 11th percentile of its annual range, implying that options players are pricing in relatively low volatility expectations at the moment. What's more, the equity's Schaeffer's Volatility Scorecard (SVS) ranks at 96 out of a possible 100, implying that the stock has tended to impress on volatility expectations in the past year.


    Then there’s RDFN, the REIT is fresh off their Sept. 10, record high of $55.43 -- a milestone that lands nearly six times above the equity’s March 18 bottom. Redfin stock is also starting October off on an impressive note, back within a chip-shot of the aforementioned fresh record high. And should the stock begin to retreat, ample support is in place to put a cap on any short or long-term pullbacks. Specifically, in recent months, the $45 level has acted as a solid floor for the shares, while from a wider perspective, the 40-day moving average has served as consistent support.

    Meanwhile, in the analyst realm, brokerages covering the REIT are leaning bearish. Heading into today, 10 of the 17 firms sport a tepid "hold" or worse. Plus, the Redfin stock’s consensus 12-month price target rings in at $43.00 -- a whopping 18% discount to current levels. Should this bearish sentiment begin to unwind, RDFN could surge even higher.

    Echoing ZG’s sentiment, RDFN sports cheap options as well, with an SVI of 63%, which ranks in the low 16th percentile of its annual range. In simpler terms, options traders look to be pricing in underwhelming expectations for the equity in terms of volatility. Further, the stock’s SVS sits at a lofty 89 out of 100 -- a boon for premium buyers. In closing, amid a market of chaos an volatility, real estate names may not be such a bad way to lean when investing your hard-earned cash.


    Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 4.


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