“Don’t fight the Fed” appears to be the safest and most profitable play in an economic landscape ravaged by the coronavirus. The axiom suggests that investors shouldn’t trade against the U.S. Federal Reserve’s actions. On the contrary, they should align their investment strategies according to the Fed’s monetary policies. This is relevant to the Canadian market as well.
The current low-interest rate environment opens a multitude of investment angles such as betting on Canadian stocks that directly benefit from the policy. Real Matters (TSX: REAL) offers that opportunity.
In this article, we explore the three reasons why Real Matters is a low-interest environment high-growth play.
Refinance Volumes Are on the Up and Up
Real Matters is a company deeply embedded in the real estate industry of the entire North American market. Its services includes:
- valuation of property
- risk management of collateral
- data intelligence services in the property market space
These services are in high demand as the low interest rate policy of the Federal Reserve and Bank of Canada fuels the surge in refinancings and home purchases in the United States and Canada. For instance, the 30-year fixed rate mortgage average south of the border stands at 3.13%, which is its lowest level in nearly 50 years.
The generational low in interest rates is driving Americans to either invest in the real estate market or refinance their old loans.
Data from Mortgage Bankers Association (MBA) reveals that applications to purchase a new home are up 21% year-over-year while refinancing applications soared 106% over the same stretch. We can expect the uptrend to continue as the Federal Reserve said it will keep interest rates steady for the rest of the year.
All of these can translate to the growth of Real Matters in terms of revenue and market share.
National Bank analyst Richard Tse echoes this sentiment. He wrote,
Looking ahead, Real Matters continues to track to its goal of 15% to 20% market share in US appraisals (from around 10.6% today) and upwards of 3% (from just over 1% today) in US Title and Close with a 35% – 40% net revenue margin and 25% – 30% adjusted EBITDA margin by the end of fiscal 2021
Real Matters Is Insulated from the Economic Fallout of COVID-19
Shares of Real Matters are up over 100% year-to-date. The stock virtually ignored the coronavirus-induced panic in March as it was trading in pre-pandemic levels less than a month after the selloff.
The stock’s impressive recovery suggests that the company is immune to the impact of the global health crisis.
Real Matters said in its fiscal second-quarter report,
To date, our operations have not experienced any significant adverse impacts as a result of COVID-19. In fact, with interest rates at historical lows, homeowner demand to refinance their mortgages in the U.S. remains high.
The numbers support the company’s claim. Real Matters crushed analyst expectations as it printed earnings per share of $0.13, beating the predicted $0.05 by 160%. The strong second quarter follows a solid first quarter as the tech company’s consolidated net revenue climbed 87.1% while its EBITDA grew nearly 160%.
Analysts already expect Real Matters to disrupt the antiquated property but that’s far off in the future. In the coming months, the conditions are ripe for the long-term growth of the company, even if a second coronavirus wave hits.
Real Matters’ Fundamentals and Technicals Look Solid
In addition to the favorable economic conditions, Real Matters is positioned for significant growth going forward because of its stellar fundamentals. The company touts a strong balance sheet that features cash and short-term investments of over $94.9 million CAD. On top of that, Real Matters’ debt is enviable at $13.2 thousand CAD.
The company also broke into profitability last year. In 2019, Real Matters registered revenue of $428 million representing a year-over-year growth of over 18%. Also, for the first time in five years, the tech firm printed a positive net income to the tune of $11.8 million.
All in all, Real Matters is in a strong financial position. The company can choose to crank up its debt and strike while the iron is hot to maximize the opportunities in the months ahead.
For value investors, REAL offers some upside potential as it is trading at next 12-month price-to-earnings ratio of 24.1 which is significantly lower than the industry average of 29.7. In addition, Real Matters’ next 12-month EV-to-EBITDA ratio of 16.6 is below the industry average of 17.8.
For technical investors, REAL is a strong buy on dips candidate. The stock is already showing signs that a short-term top is in as it struggles to stay above $25 CAD.
The ideal buy zone is between $16 – $15 CAD. Even if a second coronavirus wave triggers another selloff, that buy level should hold.
On the other hand, should REAL ignite a parabolic rally, it would easily obliterate resistance of $25 CAD and climb all the way up to $35 CAD.
Disclaimer: The above should not be considered investing or trading advice. The author does not own Real Matters (TSX: REAL) shares.
Kiril is a CFA Charterholder who is passionate about the financial markets and analyzing different opportunities for investors. He specializes in researching and reporting on equities, ETFs, mutual funds as well as commentary on different market trends.