The very sharp increase in interest rates since March 2022 has caused the number of home sales to plunge. That’s because many consumers prefer to stay in their current homes. These homeowners are paying very low interest rates. If they moved into new homes, they would probably pay much higher rates. In October, an index of pending home sales reached its lowest level since the index was launched in 2001. Among the firms that have been badly hurt by this situation are retailers that thrive on selling home-improvement products to consumers. As home sales fall, stock prices are falling as well.
The stocks of companies that primarily obtain revenue by selling homes have also sunk. Rates are likely to sink as inflation continues to fall next year. However, it’s probably too early to bet on these names at this point. That’s because they’re likely to report very bad fourth-quarter results early next year and probably won’t start benefiting from lower rates until the second quarter of 2024. Therefore, I consider these three names as stocks to sell at this point.
Redfin (RDFN)
Redfin (NASDAQ:RDFN) sells mortgages, “operates an online real estate” brokerage and offers other “real estate services.”
In Q3, the firm’s revenue sank 12% versus the same period a year earlier. Its, “real estate services gross profit” slipped 2% year-over-year.
Also noteworthy is that the the National Association of Realtors lost a class-action lawsuit in federal court last month. The lawsuit claimed that the high commissions, which real estate agents receive, has hurt consumers. Although NAR is appealing the verdict, there’s a good chance that the association will lose. This will force agents to change the way in which they’re compensated.
As a result, Redfin’s business could be very badly impacted. If, for example, agents are paid by the hour instead of through commissions, they’ll be much less motivated to spend large amounts on Redfin’s offerings.
RDFN stock is down 90% from its 2021 peak. The shares have sunk 27% in the last three months, although they’ve risen 26% so far in 2023.
Opendoor Technologies (OPEN)
Opendoor (NASDAQ:OPEN) specializes in quickly “flipping” i.e. reselling homes that it acquires. With the number of available homes to buy plunging, the company’s top and bottom lines, unsurprisingly, have also tumbled. With this trend unlikely to improve for some time, I view OPEN as one of the stocks to sell at this point.
Last quarter, its revenue sank 71% versus the same period a year earlier to $980 million. The company’s EBITDA loss, excluding certain items, came in at $49 million, better than the adjusted EBITDA loss of $211 million that it generated in Q3 of 2022.
But the improvement was likely due to the fact that OPEN laid off 22% of its workforce in April 2023, rather than any real upturn in its business.
Providing evidence for that assertion is the fact that the company’s adjusted EBITDA margin came in at a dismal -5% last quarter.
Deutsche Bank believes that elevated home prices could keep a lid on OPEN’s margins, and the firm initiated coverage of OPEN with a “hold” rating on Nov. 21.
OPEN stock has sunk about 90% from its 2021 highs. The shares are up 160% so far this year, but they’re also down 22% in the last three months.
Home Depot (HD)
Home Depot’s (NYSE:HD) revenue fell 3% last quarter versus the same period a year earlier to $37.7 billion, while its earnings per share dropped to $3.81 in Q3 from $4.24 in Q3 of 2022. The company’s operating income plunged 12% year-over-year to $5.4 billion.
“Similar to the second quarter, we saw continued customer engagement with smaller projects, and experienced pressure in certain big-ticket, discretionary categories,” said CEO Ted Decker.
In my opinion, the reason that those “big-ticket, discretionary categories” are weak for HD is that the number of consumers moving into new homes is much lower than in 2022. As a result, many fewer remodeling and large repair projects are being undertaken than last year.
HD stock is down about 25% from its December 2021 peak, and it has slipped nearly 10% from its February 2023 high.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
