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Bear of the Day: Realogy (RLGY)

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Realogy Holdings (RLGY - Free Report) is the $1.5 billion residential real estate brokerage conglomerate comprised of several national brands like CENTURY 21 and Coldwell Banker.
 
The corporation facilitates real estate brokerage services, relocation services, and title and settlement services through these and other brands like Better Homes and Gardens Real Estate, The Corcoran Group, ERA, Coldwell Banker Commercial, and Sotheby's International Realty. 
 
But this legacy "dream team" of brokers for homes, small-to-medium sized business properties and other luxury assets has fallen hard in the past 18 months.
 
From trading near its 2012 IPO price of $34 in Q3 2017, at a market capitalization over $4 billion, the stock has collapsed 65% to under $12 in the first quarter of 2019.
 
The good news for investors is that the Zacks Rank flagged this listing ship as early as Q4 of 2017 with a #5 Strong Sell rating when shares were trading above $27.
 
Subsequently, RLGY fell to $18 by Q4 2018. Which means the Zacks Rank gave investors powerful and timely advice by telling them to stay ashore, despite any big bank "Buy" ratings and lofty, smooth-sailing price targets.
 
And the Rank maintained the warning this year just weeks before Realogy reported another disappointing quarter -- including a 63% earnings miss -- on February 26 and the stock dove to an all-time low of $11.04 by March 20.
 
Here's a chart you won't see very often unless you are an institutional subscriber to the Zacks Research System platform (ZRS), a powerful competitor to Bloomberg terminals...
 
 
What you see are the weekly changes in the Zacks Rank (recalculated daily) for Realogy (RLGY - Free Report) . You can see the Strong Sell ratings in Q4'17 and into Q1'18 as the stock traded above $27.
 
Then, you might notice the minor Buy rating into late Q1'18. This incident is worth comment because the Zacks Rank only follows changes in Wall Street analyst EPS estimates.
 
So that means that both the stock price and the Zacks Rank were independently following upward EPS revisions, however minor or short-lived. 
 
And that, of course, is the essence and purpose of the Zacks Rank -- to forecast the strongest group(s) of stocks most likely to move higher based on consensus upward EPS revisions.
 
So the RLGY share price rose from $24 back above $27 on some optimism about an earnings revival. In this case, the small green bars, representing a Zacks #2 Rank Buy rating, were based on only modest upward magnitude in EPS revisions and agreement among analysts.
 
But the turnaround was short-lived. And by Q2 the analysts had turned course again and starting sending EPS estimates back down, thus the red Sell bars you see for Q2 and Q3 of 2018 in the chart above.
 
Clearly, the picture has only become worse from there and you might be asking...
 
"How did the analysts get this stock so wrong for two years to have to keep lowering their estimates every quarter?"
 
There could be many real estate broker-specific questions about fundamental business model changes with disruptors like Zillow, Redfin and many others.
 
And the housing market may be soft compared to the last euphoric go-round in 2005-07. But then again, this US economic cycle is currently in boom mode according to many robust metrics like employment, mortgage rates, wages, and equity valuations -- which would seem to support home price bullishness outside of extreme demand zones like Silicon Valley.
 
Monday, when existing home sales data came in with a 4.9% drop, RLGY fell 4.4% in sympathy. But existing home sales only retreated in March after posting the second largest monthly gain on record in February. Despite the negative headline number, Q1 as a whole posted a 1.2% gain over the Q4 2018 average, the first quarterly gain after four consecutive declines. 
 
As Brian Wesbury, chief economist at First Trust surmised, "It won't be a straight line higher for sales in 2019 but fears the housing recovery has ended are overblown."
 
The fundamental data trends seem positive and robustly so in this late-cycle consumer-driven economy... so maybe another deteriorating internal dynamic is at work in these home selling brokerages like Realogy. We may know soon enough.
 
But what is so surprising is that the people who are paid to know -- the analysts -- were optimistically forecasting, at this time last year, for renewed growth to roughly $2.30 in earnings for 2019... and now that estimate is only $1.25 as you can visualize below with the Zacks proprietary Price & Consensus chart for RLGY...
 
 
Bottom line: Real estate mega-broker Realogy may be getting near a valuation bottom -- especially with a 2.8% dividend yield -- but until the analyst earnings estimates stop going down and start going back up, we may be looking at a fundamental decline that will be hard to recover from.
 
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