WSJ: Shorting $Z/$ZG Best Bet This Year

Zillow shareholders waking up to this headline will probably call in sick today:

WSJ headline: Shorting Zillow Is Your Best Bet in Housing This Year

Sub-headline: Think the real-estate market is in for a price cut? The biggest one could still come to Zillow’s stock

Having lost two-thirds of its value over the past 12 months on the heels of its home-flipping implosion, Zillow Group has already fallen to a market capitalization of barely $8 billion, despite the fact that virtually every U.S. adult is still “surfing” its namesake site monthly. Zillow might continue to draw a crowd, but that won’t earn a business model based on transactions much money.

More pain is likely coming. On its second-quarter conference call, even Chief Executive Rich Barton, known for his upbeat, colorful divinations, described the housing market as undergoing a “rebalancing.” In July, sales of new single-family homes fell nearly 30% on an annual basis and nearly 13% versus June. New home inventory has ballooned to the highest level in more than a decade. Zillow now expects transactions to “meaningfully contract” as inventory rises this year.

In perhaps the biggest sign that Zillow isn’t expecting a miraculous recovery in the near-term, Mr. Barton said he launched an employee-retention plan this month, including an off-cycle grant of restricted stock units to employees—ultimately accepting an expected 2% dilution over a few years in an attempt to ensure his top talent doesn’t flee over lower compensation, much of which is often based on equity value.

$ZG daily chart

$Z daily chart