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Speaking of real estate, here's an interesting short

Recs

6

February 24, 2009 – Comments (0) | RELATED TICKERS: CSGP , LOOP

The commercial real estate search engine, CoStar Group (CSGP) was recently downgraded to sell by Deutsche Bank.  Even before this whole mess started, the company was experiencing weak revenue growth, but it was awarded a premium valuation by Mr. Market for its decent EPS growth.  Even after getting hammered lately, the company still trades at 20 times earnings.  The analyst who issued the sell rating belives that much of the low hanging fruit has been picked in terms of cutting costs and leveraging the company's operating system and that future EPS growth will be difficult to come by, particularly in an environment where commercial real estate is a mess and getting worse every day. Even if the company is able to maintain the same level of earnings, it should experience significant margin contraction over the next several months.  I personally am very, very leery of any company that is trading at 20+ times earnings right now.

Last quarter CoStar's revenue actually fell 1.5%.  This is the first time that the company reported a drop in revenue...probably the first of many.

The company does have a nice chunk of change on the books, a whopping $11 per share, but I believe that the weakness in commercial real estate will be so significant that the stock is in trouble even with this cash.  It will probably eventually have to start eating into it to keep things running

If one wanted to do a pairs trade in real life, they could short CSGP and go long LOOP, which trades at a much more reasonable 12 times earnings.  I am bearish on anything having to do with real estate right now.  I just need to find a way to fit this short into my bloated CAPS portfolio.

Deej

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