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What Steven Cohen Sees in the Cheapest Internet Growth Stock

December 26, 2013 | About:
Victor Selva

Victor Selva

9 followers

On Dec. 17, Steven Cohen added Trulia Inc. (TRLA). The company provides tools to research homes and neighborhoods for consumers through web and mobile applications. The company, through its tools, also enables real estate professionals to market their listings. Let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.

Deutsche Bank Opinion

Due to the Fed´s tapering it is expected higher prices and higher mortgage rates that will make buying more expensive in the coming years. For this reason it will be less attractive to homebuyers, and this is could have a major impact on the firm´s performance. Nonetheless, shares trade at 12 times its 2015 EBITDA and according to Deutsche Bank analyst Lloyd Walmsley, Trulia will grow revenue 30% in 2015 versus the 11% projected to other real estate company, Move (MOVE). Deutsche has a price target of $55 on the stock which is a very good price appreciation, and it is a good option for investors looking for capital gains.

Valuation

In terms of valuation, its price-to-book ratio of 2.8 indicates a discount versus the industry average of 3.26 while the price-to-sales ratio of 9.3 is above the industry average of 2.67.

Earnings per share (EPS) were flat in the most recent quarter compared to the same quarter a year ago. In the next graph, we include the stock price because EPS often lead the stock price movement.

Let´s see again the graph and concentrate on the stock price movement. In a technical analysis view, this pattern is quite similar to the well-known “head and shoulders pattern,” which suggests that demand that has been driving the uptrend is fading. Analysts commonly use the size of a head and shoulders pattern to project a price target for the ensuing downtrend. The size is the difference in price between the “head” and the “neckline,” which is the support level to which the price retraced after the left “shoulder” and the head have formed. If the price declines beyond the neckline after the right shoulder forms, the downtrend is projected to continue from that breakdown price by about the size of the head and shoulders pattern. It will be very interesting for this type of analysis to see what happens in the coming months and if this pattern is really confirmed.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio significantly trails the Internet Software & Services industry average and the S&P 500.

Final Comment

Trulia´s revenue growth exceeded the industry mean and I expect this to continue aided by technological changes and new product and service developments. Trulia CFO Sean Aggarwal stated, "As the real estate market continues this recovery, we are well-positioned to benefit from the uptick in marketing spend."

For a long-term perspective, I would advise fundamental investors to consider adding Trulia to their portfolios. However, this is not the only interesting option in this industry. Other real estate websites like Zillow (Z) seem to be good options too (we will look into these option soon).

Hedge fund managers have also been active in the company. Gurus like Chuck Royce and Paul Tudor Jones have invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 3.8/5 (10 votes)

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