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Tuesday, July 30, 2013 - 13:00

This Real Estate Opportunity Killed My Business... But It Could Make You 30% Gains

Tuesday, July 30, 2013 - 1:00pm

In search of a second income after graduating from college, I started a small real estate publication that worked with local real estate agents to help promote their home listings.

By broad standards, my venture could be labeled a success: On a startup cost of just $20, it had a 15-year run without needing another dime to keep it solvent. Although it certainly didn't make me wealthy, it was self-sustaining and provided me with enough extra cash to drive nice cars and purchase several decent home properties.

Then, the cash cow began to die. I was selling less in marketing and advertising services. By 2005, there wasn't enough money coming in to keep the doors open. The combination of the Internet, the housing bubble, and a consolidation of regional real estate shops had squashed the need for my little company. The market had spoken, and my business was finished.

One of the main catalysts for my company was the fragmented nature of the real estate business: It was mostly mom-and-pop shops with several regional chains mixed into the wide variety of offices dedicated to selling residential real estate.

Other than the often bug-filled and severely lacking multiple listing services, there was no way for real estate agents to differentiate themselves and promote their home listings outside of their company network. My company offered an inexpensive and effective method of intra-real estate office marketing. Other than the Internet, which was slow to catch on with the often middle-age and older real estate agents, consolidation of real estate sales offices hurt my business much more than even the market crash. However, at the same time, this consolidation provides a great way for investors to profit.

Arguably the most successful of these real estate company consolidation firms is Madison, N.J.-based Realogy (NYSE: RLGY).

Given the recent rebound in the real estate market, I think it's an ideal time to invest in this growing company. Realogy is the world's leading franchisor of real estate brokerages. The company's franchise members operate 13,500 offices and employ nearly 250,000 sales associates in more than 100 countries. The company owns household names such as Better Homes and Gardens Real Estate, Century 21 Real Estate, Coldwell Banker, Coldwell Banker Commercial, ERA Real Estate, Sotheby's International Realty and NRT, not to mention related businesses such as relocation service company Cactus Corp. and Title Resource Group, a settlement services and title company.

Realogy posted impressive second-quarter 2013 results with net revenue of more than $1.5 billion representing a 17% increase from the same period last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) was up 27%, to nearly $280 million. In addition, the $330 million retirement of high-cost debt and the $492 million refinancing of 11.5% debt with $500 million of nearly 3.4% debt will continue to help the company's bottom line. Realogy expects year-over-year improvement of 17% to 19% in third-quarter home sale transaction volume.

Considering that real estate firms earn commission from selling other people's property, real estate may be the perfect business: no inventory or commissioned salespeople, but unlimited upside. Combine this potential with the upward swing in the real estate market, and it equals a great opportunity to invest in Realogy.

Risks to Consider: Things are looking positive in the real estate sector. But there is no guarantee the positive trend will continue. The real estate market is tightly tied to the economy as a whole. Any further issues with the macroeconomic picture could negatively affect this stock. Always use stops, diversification and position size wisely when investing.

Action to Take --> Taking a look at the technical picture, the price has been in a choppy channel between $46 and $52 on the daily chart. Buying now in between $46 and $47 should allow you to get in at the bottom part of the current range. My 12-month target is $60. Stops at $42.50 will allow for more potential consolidation prior to the next upswing.

P.S. -- Part of investing is finding little-known stocks like Realogy that offer huge upside... That's why we've recently put together a special report on 17 little-known "spin-off" companies. Because of the way they were formed, these companies have beat the market 7-to-1 in the past decade and raised dividends as much as 600%, yet most investors don't understand them at all. To get the names and tickers of some of these stocks immediately, click here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.