Home buying sentiment has improved of late. In addition, the reduction in mortgage rates is expected to further support the real estate sector. Given the healthy outlook of the real estate industry, investors could consider buying quality real estate stock, AMREP (AXR). However, WeWork (WE) and Opendoor Technologies (OPEN) might be best avoided given their weak fundamentals. Continue reading.
Amid the Fed’s successive rate hikes, buying sentiment deteriorated significantly. However, conditions have improved recently. The Fannie Mae Home Market Sentiment Index (HPSI) rose 3.7 points in December 2022 to 61.0.
Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, said: “In December, the HPSI edged up slightly as consumers reported increased expectations that mortgage rates and home prices may decline next year – perhaps reflecting the recently observed declines in mortgage rates and average house prices.”
In addition, mortgage rates fell significantly last week. According to data from Freddie Mac, the 30-year fixed-rate mortgage averaged 6.09% in the week ended Feb. 2, 2023, up from 6.13% the previous week. This should boost near-term home buying sentiment.
Furthermore, the sector’s long-term growth prospects look promising. The global real estate market is expected to grow at a CAGR of 7% through 2027.
Therefore, investors could consider buying quality real estate stock, AMREP Corporation (AXR). However, WeWork Inc. (WE) and Opendoor Technologies Inc. (OPEN) might be best avoided now given their weak fundamentals.
Stock to buy:
AMREP Corporation (AXR)
AXR is primarily active in the real estate sector through two divisions, Land Development and Residential Construction.
AXR’s net income margin of 25.98% is 57.9% higher than the industry average of 16.46%. Also, ROCE of 17.94% compares to the industry average of 5.17%.
Its trailing 12-month P/E of 5.14x is 81.9% below the industry average of 28.44x, while its 12-month EV/Sales multiple of 0.94 is 90.7% below the average of the branch 10,13.
For the fiscal quarter ending in October 2022, AXR’s total revenue rose marginally from the year-ago period to $16.15 million. Its operating income was $4.47 million, indicating a year-over-year increase of 2.6%. AXR’s net income and EPS were $3.62 million and $0.68, respectively, reflecting growth of 8.9% and 51.1% from the year-ago quarter.
AXR shares have gained 12.5% in the past month to close the last session at $13.50.
Not surprisingly, AXR has an overall rating of B, which equates to a Buy on POWR’s proprietary rating system. POWR ratings evaluate stocks against 118 different factors, each with its own weighting.
It also has a B grade for Value and Emotion. AXR is ranked #2 of 42 stocks in the Real Estate Services industry.
Click here to see additional development, speed, quality and stability ratings for AXR.
Stocks to avoid:
WeWork Inc. (WE)
We provide flexible workplace solutions to individuals and organizations around the world. It provides turnkey technology-based solutions, flexible spaces and community experiences. Its product offerings include Core space-as-a-service, WeWork All Access, WeWork On Demand and WeWork Workplace.
WE’s negative 12-month EBITDA margin of negative 26.46% is lower than the industry average of 55.55%. Its trailing 12-month net income margin is a negative 73.67% compared to the industry average of 16.46%.
WE’s cash and cash equivalents were $460 million for the period ending September 30, 2022, compared to $924 million for the period ending December 31, 2021, while its long-term net debt was $1 billion compared to $666 million. Net loss attributable to WE and net loss per share in the third quarter ended September 2022 were $568 million and $0.75.
WE’s EPS is expected to remain negative this year. It has lost 74.3% in the past year to close the last session at $1.87.
WE’s POWR ratings reflect its poor outlook. It has an overall grade of F, which equates to a strong sell in our proprietary rating system.
It has an F for stability and quality and a D for value and emotion. Ranked #41 in the same industry. To view the WE Ratings for Growth and Momentum, click here.
Opendoor Technologies Inc. (OPEN)
OPEN operates a digital platform for residential real estate in the United States. The company’s platform allows consumers to buy and sell a home online. In addition, it offers securities insurance and escrow services.
OPEN’s negative EBIT margin of 4.60% is lower than the industry average of 23.42%, and its negative net income margin of 6.93% compared to the industry average of 16.46%.
OPEN’s gross loss was $425 million for the third quarter ended Sept. 30, 2022, compared with a gross profit of $202 million in the year-ago period. Its net loss was $928 million, up 1528.1% year over year, while loss per share was $1.47, up 1533.3% year over year.
The Street expects OPEN’s revenue to decline 49.8% year-over-year to $2.59 billion for the quarter ending March 2023. Its EPS is expected to decline 1675% year-over-year to a negative 0 $.63 for the same period. It has missed EPS estimates in three of the last four quarters. The stock has lost 75.6% in the past year to close the last session at $2.36.
OPEN has an overall rating of F, which equates to a strong sell in the POWR rating system.
It has an F grade for development, stability and emotion and a D grade for quality and momentum. It ranks #40 in the same industry. We also rated OPEN for Value. Get all OPEN scores here.
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Shares of AXR were flat in premarket trading on Wednesday. Year-to-date, AXR has gained 16.88%, versus an 8.57% gain for the benchmark S&P 500 over the same period.
About the Author: RashmiKumari
Rashmi is passionate about capital markets, wealth management and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master’s degree in commerce, he aspires to make complex financial issues understandable for individual investors and help them make the right investment decisions.
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