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Should You Buy Zillow After It Reaches An All Time High?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I want to show you 1 Reasons To Avoid Zillow so you can continue building your wealth safely.

1 Reasons To Avoid Zillow (Z)

Years back now, Zillow (Z) took the world by storm and became the hot way to look up homes for sale online.

It rode this excitement into an IPO on July 20th, 2011 at $20 per share.  And has been on a ride almost straight up since…  Reaching an all-time high share price of $118.42 just days ago on November 6th, 2020.

But is it a good stock to buy now?

Let’s find out…

  1. It’s Unprofitable

In the most recent quarterly data Zillow was unprofitable on a net income basis.  And only positive on a free cash flow basis because it issued shares.

  • In the first 9 months of 2020, Zillow’s had net income of negative $208.2 million.
  • Its operating profit margin is negative 3.7% in the last 12 months.
  • And in the last 12 months its only positive free cash flow due to issuances of shares.

Right now, its shares are going up because Zillow’s “adjusted EBITDA” rose in the year to year quarterly period from negative $65.7 million last year to positive $39.6 million this year.

Key tip…

If you see a company touting “adjusted EBITDA” you need to be careful…

Warren Buffett calls these earnings BS Earnings for good reason. They’re easy to manipulate.

For example, in this case, Zillow earned a net income in the first 9 months of 2020 of negative $208.2 million.

But its adjusted net income is positive $173.1 million.

This is a swing of $381.3 million in their favor.

Zillow did this by “adjusting” their earnings according to accounting regulations to make it look like they made more money than they did.

This is legal – in most cases – if you follow accounting rules and laws.  And I’m not saying Zillow broke any rules here because I don’t see anything wrong with what they did from an accounting perspective.

And because I’m not a forensic accountant whose job it is to look for fraud.

I’m here to help you invest well for your retirement.

And huge adjustments like this don’t make it right in a real-world sense.

You want profitability margins to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.

For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.

And I look for stocks FCF/sales margins above 5% on a consistent basis.

Why these numbers?

Because after evaluating thousands of companies over the last 14 years of my career I estimate fewer than 5% of all companies in the world surpasses these thresholds… So, when a company does it makes it a great business.

High profits allow the company to continually reinvest in and grow its businesses in a healthy way.

But if a company doesn’t surpass these thresholds – like Zillow without the issuance of shares – this leads the company to having less money to reinvest in the business to continue competing well.

For this reason, I recommend avoiding its stock… Even though its shares keep going up.  Because in a real-world economic sense its profits are still negative before massive adjustments.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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