Although the housing market activity has shown periodic signs of life, we’re still awaiting a more vigorous and sustained rebound. Yet a glimpse of recent trends brings fresh hope.

Real estate information firm RealtyTrac reported the resurgence of a once-popular trend: house flipping. Buyers that seek to purchase a home, fix it and sell it for a quick profit, are once again making money. Last year, the average gross profit from flipping a property was $72,400, the highest figure since 2011.

The news has largely escaped media attention, but it is an important vital sign for the industry. You see, flipping helps boost the supply of available homes, which in turn draws more buyers.

In 2015, the average gross margin on house flipping has increased above 40%, with many major cities posting gross profitability on flips of 50% and higher.

Pending home sales in April were up an impressive 14% from a year ago, which bodes well for the rest of the year. Pending sales are a leading indicator and the return of flipping can mean multiple sales in a year for the same property.

While the recovery will help boost players in the sector, one company is set to reap the biggest benefit because of its ability to profit from activity in the sector, regardless of whether sales prices surge.

This Stock Is Down But Still The Leader
Real estate web property Zillow Group, Inc.  (Nasdaq: Z) controls 48% of the estimated $9.7 billion online market for real estate agent spending. The company operates its social real estate portal, providing content and valuation estimates for the market, while also selling advertising on its website. The integration of home buying and the online experience has become a clear trend in housing with 90% of homebuyers using the internet in their search and 50% using mobile apps, according to the National Association of Realtors.

#-ad_banner-#​Zillow recently completed its acquisition of Trulia to give it approximately 73% control of the online market, followed by Realtor.com with about a quarter of the market. Shares are off their 52-week high by nearly 42% as the company integrates Trulia and sets up for a face-off with News Corp. (Nasdaq: NWSA), which acquired Realtor.com-owner Move, Inc. last year.

Shares of Zillow fell 13% in April when the company provided an operational update in connection with the Trulia acquisition. CEO Spencer Rascoff called 2015 a year of transition and lowered sales guidance to $690 million. Much of the selloff has been in connection with fears of lost listings from ListHub, owned by Move, after it announced it would stop sharing its leads with Zillow and Trulia.

Despite these fears, the Trulia acquisition could be a major opportunity and sets Zillow up as the dominant player in the market. Management commented in the operational update that the company is gaining listings after the ListHub split saying that Zillow is, “establishing direct feed relationships with hundreds of [multiple listing services] MLSs since split. Both sites now have more active listings than they would have had if [ListHub] contract had not ended.”

Management has also commented that it is targeting a 40% EBITDA (earnings before interest, taxes, depreciation and amortization) margins, thanks to synergies gleaned from the acquisition.

The selloff in the shares has lowered the price-to-sales multiple to less than seven times projected 2015  sales, less than a third of the multiple reached in the June quarter of last year. Sales are expected to double this year to $675 million and grow 30% next year to $879 million.

The selloff in April appears to have marked a low-point in sentiment with shares trading flat since then. The long-term outlook is extremely strong as the company takes advantage of its dominance. A surprise upside to housing this year as sales activity picks up could provide for a potential pop in the shares. 

My target of $112.78 per share is based on a conservative multiple of eight times my own estimate for $690 million in 2015 sales.

Risks To Consider: Combining two of the three largest companies in online real estate risks integration challenges that could weigh on shares. Investors should be ready to wait out near-term headline risks for longer-term gains.

Action To Take –> Take advantage of the recent selloff in shares of Zillow to position in the market leader for online real estate and the potential for upside surprise this year as the housing market heats up.

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