Yesterday I wrote a piece about the housing market in the April Issue of Cabot Early Opportunities. I received a ton of email responses afterwards. Given the interest in that topic I want to share what I wrote to Cabot Small Cap Confidential subscribers as well. My apologies for the repetition to those of you who are subscribers to both!
I’m interested to hear more about what you all think of the residential housing market right now, and the underlying trends behind the strength and re-distribution from cities to more urban areas. If you have thoughts to share and/or observations of your own, please email me. My address is tyler@cabotwealth.com.
This is what I wrote.
Going Once, Going Twice, Gone!
In the last 48 hours I have received two unsolicited offers to buy property we own. The first was for our second home in Vermont, a handyman’s special I bought in 2004 and sank nearly a decade of blood, sweat and tears into while completing a significant remodel, most of which I did myself. Now that it is pretty much done (as far as any house ever is) I’m in no mood to sell. We use it frequently to ski, and like knowing we have a store of value if our college savings plans go awry.
The second was for our primary residence in Rhode Island. We’d gladly let that one go, as it was never meant to be a house for a family of four. The catch is that there isn’t exactly a big inventory of next-size-up houses, at least none that are desirable in the areas we’d prefer.
I’m not sure what to make of this situation. On the one hand, from our vantage point, it’s certainly nice to already own residential real estate and not be first-time homebuyers right now. I feel for those who have been priced out and/or cannot find something suitable within their budget.
On the other hand, it seems the housing market is undergoing a structural change that could put what were once reasonable homes (a relative scale, for sure) out of reach. This is due to the confluence of both demographic and pandemic-induced changes.
The rising generations, that for so long did not seem interested in buying, now are. And the throngs of people who previously needed to work in and around major urban areas are suddenly free to go wherever they wish without any geographic-related salary reduction (at least for now).
My examples of offers for homes in Vermont and Rhode Island aren’t outliers. The same trend in the housing market appears to be happening around the country. We are currently visiting my in-laws in North Carolina. Their development typically sees 12 new homes built every year. There are 38 under construction this very moment.
Stepping back, this scenario is reminiscent of the dramatic structural shifts in work-from-home stocks that began roughly a year ago. That trend caught fire quickly, burned intensely for several months, then began to cool. But it is far from being snuffed out – work from home and the wider group of Internet, e-commerce, cloud, digital, etc. stocks, while well off their highs, are still up significantly from where they were pre-pandemic.
Will the housing market follow a similar curve?
Real estate is far less liquid than equities. Whereas stocks offer little to no utility (maybe dividend payments, in some cases), real estate offers it in spades. In many ways homeownership represents a form of consumption with a (usually) appreciating asset.
I don’t bring this up because today’s Issue is focused on housing related stocks. There is no such common thread. Rather, it’s on my mind because the strength in the housing market helps illustrate just how dramatic and widespread the trend shifts are as a result of the Covid-19 pandemic.
As we move forward the simple and often repeated narrative of “everything will go back to normal once enough people have been vaccinated” will likely prove to be far from accurate. More likely is that a new normal will emerge, and it will be different from what was expected.
As investors we need to keep our eyes open and ears to the ground as we seek out opportunities to participate in what that new normal could be.
Recent Changes
None
Updates
Accolade (ACCD) pulled back this week with growth stocks, despite a note from Needham late last week as the firm slapped a 59 price target on shares (ACCD closed at 45 yesterday). BUY
First Quarter Earnings Date: Wednesday, May 5
Arena Pharmaceuticals (ARNA) will present data from the Phase 2b ADVISE trial for etrasimod in moderate-to-severe atopic dermatitis (AD) tomorrow at the American Academy of Dermatological Virtual Meeting Experience. The stock hasn’t done much over the last couple of weeks. HOLD
Avalara (AVLR) recently announced the acquisition of certain operational assets from DAVO, a sales tax automation company focused on small businesses. DAVO has 4,000 customers, including coffee shops, bike shops, restaurants and more. A Point of Sale (POS) integration is part of the solution, which ties directly into platforms such as Clover and Square. This is further evidence of Avalara’s systematic approach to building a large sales tax compliance operation. I like it. The company also just announced availability of Avalara Shipping Verification for Beverage Alcohol, which is for direct-to-consumer (DTC) alcohol businesses. Another incremental positive. Expect more details on all of this on May 6. BUY
First Quarter Earnings Date: Thursday, May 6
BioLife Solutions (BLFS) continued to pull back early this week and hit the 50-day line, where it bounced yesterday. We’re back to around our entry point, which I don’t love, however this “should” be an area where BLFS gets some support. BUY
Cardlytics (CDLX) will report a week from Tuesday. The recent acquisition of Bridg will be very interesting to hear more about. I like the high-level strategic move for Cardlytics to be in position to provide both product level SKU data as well as retail level data. I think that’s the future and advertisers will be able to do so much more with that data than just one or the other. I do wonder about the purchase price ($350 million, plus $100 to $300 more in earn outs). HOLD
First Quarter Earnings Date: Tuesday, May 4
Cerence (CRNC) took as a step down this week but has so far held above previous lows near 80. No new news. HOLD
Everbridge (EVBG) was able to hold relatively steady this week during the growth stock selloff. That suggests to me that this extended consolidation phase may be nearing an end and EVBG’s next big move could be higher. Keeping at buy. BUY
Fiverr (FVRR) continues to take a breather and there’s been no news of late. Keep holding. HOLD HALF
Second Quarter Earnings Date: Thursday, May 6
Goosehead Insurance (GSHD) has been stable for the last two weeks and at 40% off the stock’s all-time high is looking interesting here. This week Keefe, Bruyette and Woods upgraded GSHD to “Outperform” and put a 130 price target on it. Keep holding. HOLD HALF
Inspire Medical Systems (INSP) is holding up well just above its 50-day line and roughly 10% off the stock’s all-time high. I upgraded to BUY last week and am sticking with that rating. BUY
Second Quarter Earnings Date: Tuesday, May 4
Kornit Digital (KRNT) continues to move sideways right on its 50-day line. No major news to report. I still like it. BUY
First Quarter Earnings Date: Tuesday, May 11
Porch Group (PRCH) has been unbearably weak for a while now and particularly so since last Thursday. On the one hand this weakness is suggestive of a stock we should bail on. However, on the other hand PRCH has been prone to big and rapid pullbacks since coming public, it did so via a SPAC IPO and those stocks have been crushed lately, and there was the Spruce Point short report. Three strikes? Well, as I wrote in my introduction the housing market is going absolutely bonkers and with the pressure from the aforementioned factors the risk taker in me says give PRCH a little more rope, and if you’re feeling frisky, maybe it’s time to buy into this garbage pullback. This is a situation where investors need to do what they feel most comfortable with. There is most definitely big upside potential here. Even if PRCH never makes it back to its previous high of 24.4 even a move to the mid-to-high teens would represent a meaningful gain. Is it risky? Yes. But if you have money to play with and are willing to stomach the downside risk then maybe it’s worth it. On balance, I’ll leave PRCH at BUY now and continue to watch closely. BUY
Q2 Holdings (QTWO) is still flatlining just above the 100 level. No new news. I continue to think it represents a very compelling stock to buy right now. BUY
First Quarter Earnings Date: Wednesday, May 5
Revolve (RVLV) pulled back this week with many other stocks but has enjoyed a little strength yesterday and early today. No new news, other than the earnings date on May 6. BUY
First Quarter Earnings Date: Thursday, May 6
Repligen (RGEN) has been walking higher along with many MedTech stocks. The iShares Medical Device ETF (IHI) has just broken out to a fresh high. BUY
First Quarter Earnings Date: Tuesday, May 4
Sprout Social (SPT) pulled back this week with other software stocks but as with many, the dip hasn’t been as deep as those in March. Looking forward to earnings on May 4. BUY
Second Quarter Earnings Date: Tuesday, May 4
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
