shares hit a record high Thursday morning as a trio of analysts lifted their price targets for the online real-estate firm, amid a booming housing market in many parts of the country. In particular, they are bullish on the company’s increasing focus on buying, repairing and reselling houses—the so-called iBuyer market.
That market has attracted new attention after Zillow rival Opendoor announced plans to go public via a reverse merger into a SPAC, or special purpose acquisition company. The terms of the deal have spurred analysts and investors to reassess their views on Zillow’s growing role in that market—and they see an expanding business that might be undervalued.
Truist analyst Naved Khan repeated his Buy rating on Zillow shares (ticker: Z), upping his price target on the stock to $115 from $108. Khan said a side-by-side comparison of the Zillow and Opendoor iBuyer businesses “points to significant room for margin improvement” for both Zillow’s Homes segment and its mortgage business. He said gross margins in Zillow’s iBuyer business should improve, as repair costs for purchased homes come down “with scale and analytics.”
Deutsche Bank’s Lloyd Walmsley likewise repeated his Buy rating on Zillow, while raising his target price to $140 from $115, citing the expected valuation of the Opendoor transaction as evidence that Zillow’s home-flipping business is undervalued. Walmsley said he now values the Zillow Homes business at about $49 a share, up from $25 a share previously. The analyst said Zillow’s valuation can “re-rate higher,” driven by the additional focus on the iBuying segment from the Opendoor listing, continued strength in the housing market, and growth in the company’s mortgage business, among other factors.
Jefferies analyst Brent
Momentum investing is all about the idea of following a stock’s recent trend, which can be in either direction. In the ‘long’ context, investors will essentially be “buying high, but hoping to sell even higher.” And for investors following this methodology, taking advantage of trends in a stock’s price is key; once a stock establishes a course, it is more than likely to continue moving in that direction. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.
While many investors like to look for momentum in stocks, this can be very tough to define. There is a lot of debate surrounding which metrics are the best to focus on and which are poor quality indicators of future performance. The Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.
Below, we take a look at Meritage Homes (MTH), which currently has a Momentum Style Score of A. We also discuss some of the main drivers of the Momentum Style Score, like price change and earnings estimate revisions.
It’s also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Meritage Homes currently has a Zacks Rank of #1 (Strong Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.
You can see the current list of Zacks #1 Rank Stocks here >>>
Set to Beat the Market?
Let’s discuss some of the components of the Momentum Style Score for MTH that show why this homebuilder shows promise as a solid momentum pick.
Looking at a stock’s short-term
Will the housing market crash again? Maybe. Many aspects of the economy are cyclical, and housing prices do occasionally fall. Is a housing crash imminent? That’s harder to answer.
Some have sounded the alarm on housing for good reason. Consider the famous Case-Shiller Home Price Index, an inflation-adjusted metric created by Standard & Poor’s tracking housing prices. The index’s value was 100 back in the year 2000 and had been close to 100 when applying the index’s criteria backward to the 20th century. But since 2000, it has risen above 180 on two occasions. The first time preceded the housing crash of the Great Recession.
The second time the Case-Shiller index exceeded 180 is right now. In reality, it passed the mark way back in 2016, and it’s currently around 215. So no need to panic: Crossing 180 doesn’t immediately flip a housing-crash switch. It just shows housing prices have gone up a lot. The bigger problem, though, is how much faster home values are growing relative to average income. Consider the data over just the last 10 years.
It’s probably unsustainable for home values to outpace personal income long term. Eventually people could be priced out of affordable housing, and that could spark a housing market correction. Will that affect companies like Home Depot (NYSE:HD)?
To answer that, we can start by going back to the Great Recession.
The last time Home Depot’s revenue fell
Home Depot’s revenue fell from 2007 to 2009. In fiscal 2006, when things were going well, the company generated $90.8 billion in full-year net sales. In fiscal 2009, it generated just $66.2 billion — down 27% over three years. Likewise, net earnings took a hit as the company lost operating leverage from lower sales per location.
Oppenheimer downgraded LOW to “perform” from “outperform”
The shares of Lowe’s Company Inc (NYSE:LOW) are down 1.2% at $161.69, after Oppenheimer downgraded the stock from “outperform” to “perform,” with a price-target cut to $180 from $185. The firm downgraded sector peer Home Depot (HD) as well, noting that home improvement stores’ recent outsized gains could reflect a demand pull going forward. With that being said, the analyst in coverage sees modest upside for the shares in the long term.
On the chats, LOW has been repeatedly rejected by the $171 level as of late, but not before acquiring a fresh Sept. 16 all-time high of $171.72. Now seeing pressure from the 20-day moving average, the equity is on track for its first monthly loss in six, though it does remain up 35% year-to-date.
Coming into today, 18 analysts carry a “buy” or better rating on Lowe’s stock, with the remaining three at a lukewarm “hold.” Meanwhile, the 12-month consensus price target of $181.31 is a 10.7% premium to current levels, indicating an overall sense of optimism from covering firms.
The options pits are also looking overwhelmingly bullish. LOW’s 50-day call/put volume ratio of 2.59 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands higher than all other readings in its annual range. This means long calls are being picked up at their fastest rate in a year.
Options look like a good way to go when weighing in on Lowe’s stock as well, as it is currently seeing attractively priced premiums. The stock’s Schaeffer’s Volatility Index (SVI) of 33% sits higher than 14% of readings in its annual range, suggesting short-term options are pricing in relatively low volatility expectations.