I don’t follow Zillow in particular but I do like the group known as “Internet Information Providers” (IIP). Zillow is listed as “Property Management” but they fit the IIP group much better. The attraction for me is fast growth and a strong moat based on the network effect they create. The downside is the risk and difficulty of buying them, they are usually overpriced – WAAAAY overpriced.
Take a look at the four year chart:
Anyone buying at the right time made a killing but at the wrong time has a big loss. That’s how these stocks work and you need this knowledge to buy the stock if you are not willing to trust to luck. The rule of thumb is that these stocks can have a 50% drop at any time. Z went from $160.32 on July 28, 2014 down to $95.43 on February 2, 1015, a 40.5% drop. For me, these stocks are out of bounds most of the time, whether they are or not making money. Of course, the ones making money are better than the ones making a loss. The promise of a pot of gold at the end of the rainbow is a strong temptation better to be resisted. Better a bird in the hand than two in the bush.
Rules for buying:
1.- make sure you have a really good reason to buy, that the company’s story makes good sense: leader of a category; if not the leader, an even better reason to buy; strong network effect; etc.
2.- at least a 25% drop from a recent high which will keep you out of most of them most of the time
3.- sell covered calls when you buy to get an “extra 10% or higher discount” when you buy. Make sure the strike price is high enough to warrant the deal (CAGR above 25%)
I have looked at Z for some time but never bought. Instead I bought BITA on October 9, 2013 at $19.70 and sold April 2014 covered calls with a strike price of 25 for $2.30. The stock was called: profit 40%, CAGR 97%. If it hadn’t, my cost basis would be $17.40, an 11.7% discount on the going price of $19.70.
Please look at the chart:
BITA had not yet gone into exponential takeoff mode by October 2013 but the story was right. By selling the covered calls I missed a lot of upside but I can’t complain about a 40% short term gain and the potential to have a five bagger. Buying BITA today is a different story, I might have done it when it fell below $60.
Instead I bought TRIP on December 4, after it started recovering from the early November gap down. No covered calls this time
My point is that these fish need special handling to be safe. They are tasty as hell!