Zillow’s Zing

American homeowners might not actually be listing their homes for sale – but they want to. Why? Because it's a tale of two markets in the U.S., with home prices rising, but inventory thin, as homeowners just aren't sure they want to let their properties go when they're once again climbing up in terms of home value.

According to CoreLogic, which tracks home prices on a monthly basis, U.S. home prices increased by 11.1 percent from March 2013 to March 2014. That represents 25 straight months of year-over-year price appreciation growth for U.S. homeowners, after four years of no or low growth.

It's a strange dichotomy, as higher prices would normally lead to a stronger real estate market, as more owners sought to capitalize on higher prices. But the Great Recession took such a heavy toll on the housing market that homeowners seem to okay with waiting  awhile while their homes regain lost pricing value.

"March data on new and existing home sales was weaker than expected and is a cause for concern as we enter the spring buying season," says Dr. Mark Fleming, chief economist for CoreLogic. "Interest rate-disenfranchised potential sellers are adding to the existing shadow inventory, while buyers who can’t find what they want to buy are on the sidelines creating a new kind of ‘shadow demand.’ This supply and demand imbalance continues to drive home prices higher, even though transaction volumes are lower than expected."

In such a downright weird real estate market, how can investors make money on the housing sector, even with prices high and sales transactions low. Here's one idea – choose an industry stock that makes money when homeowners even  think about selling their property.

That's where Zillow (NYSE: Z) pops into the picture. Besides its standard, and increasingly profitable Premier Agent, Mortgage Marketplace and Zillow Rentals services (p! rimarily geared toward real estate and lending professionals), Zillow also caters to a growing number of buyers and sellers who seek more information on the housing market before pulling any triggers.

Here's how Zillow explains that end of its business: "The company offers information products and services that enable consumers to make decisions about homes comprising home value and rental price estimates; Zillow Digs, a home improvement marketplace for home shoppers and homeowners to find visual inspiration and local cost estimates; and a rich set of home-related information for consumers and real estate professionals, as well as services for sale and rental listings.

Further, it provides consumers with ratings and contact information for the listing agent and local buyer's agents alongside home profiles and listings for homes to assist for evaluating and selecting the real estate agent. In addition the company provides home-related advice and discussions through Zillow Advice section of its Zillow.com Website that captures questions and discussion topics from consumers and real estate, rental, mortgage, and home improvement professionals, as well as operates mobile real estate applications."

That leads to tens of millions of clicks on Zillow's site, which is manna from heaven for advertisers, real estate firms and mortgage lenders. Zillow is trading at $97 per share as of May 9, 2014, and shows every sign of going higher. The stock has been on something of a roller coaster ride through 2014, gyrating between $85 and $110 per share over the past four months.

Sure, nobody likes that kind of volatility – especially a stock that's already in a volatile sector in the first place. But Zillow is showing major signs of stabilizing, and heading northward for good, in the $115-to-$120 range in the next few months.

That's the sentiment from two Wall Street analysts – Pacific Crest (upped its outlook from $105 to $115) and Susquehanna (from $115 to $120.) In ad! dition, s! ome pretty savvy investors are beefing up their Zillow positions.  Hedge fund Tiger Global Management revealed a 9.5 percent stake in Zillow, with 3.13 million shares, on April 29. That news alone boosted Zillow's share price by 5 percent.

Another factor that should stabilize, and drive, Zillow's stock is an especially strong first quarter of 2014, especially in terms of revenue growth. Zillow reported revenues grew to $66.2 million in Q1, ahead of consensus estimates of $63 million. It's also a 70 percent positive growth rate compared to the first quarter of 2013. There was a net loss of 6.26 percent for the quarter, but Zillow executives have a good, forward thinking explanation for that.

“We're spending tens of millions of dollars in online and off-line advertising, because we feel the size of this opportunity warrants it," said Zillow CEO Spencer Rascoff. "We are investing very heavily to feed this growth.”

As noted above, site visits to Zillow.com are off the charts, standing at 79 million user visits alone in April, 2014. That's a 50% hike from April, 2013. Zillow is also consolidating real power in the mobile sector, with 460 million home views by U.S. smart phone users.

Zillow also expects to make hay with its new Zestimate forecast tool, released on May 8, 2014. By and large, the service predicts what a home will sell for one year from now.

The company explains the new service like this: If a home at 123 Main St. has a current Zestimate of $200,000, the Zestimate forecast for that home in one year might be $210,000, which means Zillow is predicting that home’s value will increase by 5 percent. That helps homeowners, homebuyers, and real estate professionals get a better handle on the market – one year in the future.

That's another reason why Zillow has such a compelling story to tell investors – it knows what's happening now, and knows what will happen one year from now in the U.S. residential real estate market.! In an in! dustry where data is king, that's a valuable commodity for investors, who should find a new home for Zillow in their portfolios as it heads toward $120 per share.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.

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