MorningWord 10/19/13: $Z – Zillow Talk

by Dan October 18, 2013 9:53 am • Commentary

MorningWord 10/19/13:  Getting trades right on the short side has been a tough task over the last month or so, ha or year or so for that matter.  We have done our best to avoid “picking tops” in high fliers (despite a tiny lapse with a couple wide put butterflies in NFLX & TSLA here, more for shits and giggles) as we fully recognize the fact that there is a large part of the rally that feels bublicious, and who knows how long it could go on for.

A little more than a month ago I was preparing to debate the merits of Zllow (Z) at $1oo on Fast Money and after a little work, this one stuck out to me like a sore thumb, that is if we were not in bizzaro late 1990s investing world.  My quick analysis is below, but the most important take-away may be the chart of the stock from Sept 4th:

Zillow 1 yr chart from Bloomberg
Z 1yr chart to Sept 4th, 2012 from Bloomberg

Now flash forward almost 6 weeks, the broad market is back to the previous highs, and Z can’t get out of its own way:

Z 1yr chart to today from Bloomberg
Z 1yr chart to today from Bloomberg

To suggest that the stock looks and acts heavy from a technical standpoint is an understatement with the next real support level at $70 and the monster support level at $60, the prior resistance in the spring/summer.

Trading is hard, of the 3 speculative Butterflies that we laid out in late Aug/early Sept in highfliers, the Z (here) was the only one we didn’t trade (was a Name That Trade) and it just so happens this one went straight to our short strike and would be worth about 2x what it cost back in early Sept.

At this point Z is a tough press on the short side given its relative weakness, but that very relative weakness makes it a great short candidate on a failed bounce, we are keeping a close eye on this one.



Name That Trade – Zillow: World War $Z

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Tonight on Fast Money at 5pm I will be debating a very formidable opponent as to the current investment thesis for Zillow.  Taking a quick look at the company today I find myself almost dumbfounded that stocks like this exist in this market at this stage of the economic recovery.

The stock is up 2% today, making fresh all time highs on news that Australian Billionaire James Packer took a 9.4% stake in the company making him the second largest shareholder.  Seriously who the hell am I to argue with a billionaire but I am not sure on what planet buying a stock of a company with no earnings trading at 23x sales up 265% on the year is likely to be a profitable strategy, at least in the near term.  I obviously have no idea his reasons or time horizon, but it is safe to assume he is in it for the long haul and and sees the stock trading at multiples of its current price.

On Aug 19th, the company sold 5.78 million shares at $82 for existing shareholders and on behalf of the company, it is safe to assume that Packer participated on this deal and his residual buying could be one of the reasons for the stock’s 25% gains since.  I am not sure about you, but buying now as the company and others who have been in the stock at all time highs seems like a dicey proposition.  That being said it has been even a dicier proposition trying to short stocks like this year, 23% short interest where the top 10 shareholders control almost 60% of the shares outstanding.

Those of us who have lived through prior stock market bubbles know how this ends, but trying to pick tops is a fools errand, unless u do so at perceived inflection points with defined risk.  I would argue that when this Web 2.o or 3.0 thing ends it may be worse than in the Web 1.0 collapse as there a few names that speculators are concentrated in.

As a trader though,  I can see what a stock with Zillow’s characteristics looks attractive to play for breakouts.  The one year chart below shows the stock in spring, early summer basing and building steam.  If you bought that all you had to do was keep raising your stop!

Zillow 1 yr chart from Bloomberg

Zillow 1 yr chart from Bloomberg


My quick take is there is nothing particularity special about this company, they have lots of competition in the online home sale space from the likes of Trulia, and Redfin.  While the company is seeing pretty impressive sales growth, expected to grow 40% a year for the next 2 years (it is rapidly decelerating), they have seen the costs of acquiring those sales to go up to almost 50% of revenue.   Aside from the user-interface this is a fairly low tech business from what I can tell.  The company relies a great deal on human sales people calling human listing agents to get their fees, not sure paying north of 20x those sales makes sense for a business that resource intensive that lacks scale.

I wouldn’t short the stock because it is obviously a mania, but you would have to have your head checked to initiate  new longs at current levels.  If you want to own speculative stocks like this, wait for a pull back, wait for them to base as it did back in early summer and take a shot that way, don’t be the last guy paying the highs.

Hypothetical Trade:  I am not ready to pull the trigger yet, I am looking to see how the stock reacts up here at new highs.  With implied vol very high, outright put purchases are extremely expensive, and just as I said buying a stock like Z up 265% on the year is a bit reckless, so would it be trying to pick a top.   I am considering wide Put Butterflies looking out to November expiration which would catch their Q3 earnings announcement.  The recent housing data suggests that the recovery could be pausing with rates rising, and this could be exacerbated by a Fall Taper by the Fed, I have to assume that Z would be adversely affected by a confirmed slowdown in housing.

Name That Trade:  Z ($101) Buy Nov 100/80/60 Put Fly for ~$5.00

Break-Even On Nov Expiration:

Profits: Btwn 95 and 65 make up to 15, max gain of 15 at 80

Losses: btwn 95 & 100 and btwn 60 and 65 lose up to 5.00, above 100 and below 60 lose 5.00

Trade Rationale:  It is nearly impossible to play from the short side with long premium, I considered selling upside call spread but the risk reward does not look favorable given how squeasy the stock has been.  I am not pulling the trigger now, but wanted to lay out the thesis and continue to consider ways to play for a pullback.