Table of Contents
It was a nerve-wracking month of August for investors.
After the Federal Reserve in July kept interest rates at 5.25% to 5.5%, where they have been for more than a year, investors clamored for a revival.
The S&P500 fell 6% during the first three trading days of August, after a series of bleak economic data convinced investors that the economy was weakening faster than expected and that the Fed had made a mistake by not cutting rates.
Stock prices tumbled on Monday after a surprise interest rate hike in Japan led to the end of a global economy.conduct tradein which investors had borrowed a low-interest yen to invest in risky assets in the US, such as the ‘Magnificent Seven’ stocks.
Following the sharp three-day sell-off, economists now expect the Fed to cut rates by 50 basis points at its September meeting and at least another 50 basis points before the year is out.
The economy will likely remain uncertain, but one thing is clear. Lower interest rates will revive a struggling housing market and breathe new life into stocks that rely on real estate transactions.
This sector has been hit hard by the housing market slowdown, but a turnaround could be near. One stock that could rise during the recovery is Compass (NYSE: COMP)the nation’s No. 1 real estate brokerage by sales volume.
Can Compass get back on track?
Compass went public in the spring of 2021 when the real estate market flourished and mortgage rates were around 3%. That boom didn’t last long, however, and by the time 2022 rolled around, revenues were down and the stock was faltering.
With the housing market still on ice, Compass has focused on realigning its cost structure, investing in technology and expanding its broker base, which has helped increase revenue even in a challenging market.
Revenue rose 14% to $1.7 billion in the second quarter, and Compass’ head agent count rose 24% to nearly 17,000 as it lures new agents with an attractive technology platform and a steady marketing push. After two years of declines in total transactions, the company has returned to growth, a sign that the industry is starting to turn around.
Compass is also targeting positive free cash flow this year and making progress on profitability as adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose from $30.1 million to $77.4 in the seasonally strong second quarter million.
The real estate brokerage industry is in flux after a lawsuit against the National Association of Realtors forced brokers to adjust their business models with more disclosures and information that makes it clear that traditional 3% commissions are negotiable. As part of the settlement agreement, Compass agreed to pay $57.5 million.
Compass has also allayed concerns that the deal would dramatically change the industry, noting in May that in the first weeks after the settlement, 99% of new listings included offers to pay the buyer’s agent, and 96% included 2% commission offers or more. . Compass believes the settlement will have little impact on full-time professional agents.
What a lower interest rate would mean for Compass
The housing market may never return to the heady early days of the pandemic, when urban Americans were looting second homes and suburban lots with gardens, and mortgage rates fell to less than 3%.
However, there is significant pent-up demand from home buyers who are looking for falling interest rates to effectively lower prices by lowering monthly payments, and from potential home sellers who may not want to give up their low mortgage rates if current rates are so high.
In June, existing home sales fell to a seasonally adjusted 3.89 million, down from a peak of 6.6 million in 2021, a decline of 41%. Reversing that loss would mean a 70% increase in sales of existing homes.
Compass doesn’t need that, but even a return to pre-pandemic levels would represent a 50% increase over current existing home sales, and that should ultimately make a significant difference. CEO Robert Reffkin told investors this spring, “We believe that if rates come down it will cause a dramatic increase in transaction volume,” and he predicted that lower interest rates would mean hundreds of millions in adjusted EBITDA and free cash flow, assuming a normalized annual home sales of 5.4. million-5.6 million homes.
The company is already moving in the right direction, with double-digit revenue increases, and growth is likely to accelerate significantly as mortgage rates fall and the housing market rebounds.
Compass shares have already more than doubled from last November’s lows, trending on hopes of a recovery in the housing market and stabilization in its own business. With a 79% decline, Compass doesn’t need to make up for these losses to be a winner. The stock could double by recouping just a quarter of these losses.
If the Fed cooperates and the housing market shows signs of life, a doubling for the real estate brokerage certainly seems within reach.
Should you invest €1,000 in Compass now?
Consider the following before purchasing shares in Compass:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Compass wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns August 6, 2024
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.
With a decline of 79%, this growth stock could double during the housing market recovery was originally published by The Motley Fool