It's been a rocky start to 2022, but with volatility comes opportunity. I did a little portfolio pruning this month, and added to some of my established positions. However, I also added some new names to my portfolio. I finally bought into Zillow (ZG 3.39%) (Z 3.35%) and Twilio (TWLO 5.66%) in January, taking advantage of the sell-offs in both stocks -- and I didn't even nail the bottom. I also bought into ZIM Integrated Shipping Services (ZIM 1.14%), a stock that scratches some income and value investing itches -- and offsets my typical preference for growth.
Peek inside my shopping bag: I want to show you my haul, and break down the reasons why I was attracted to these particular stocks during a month when some investors were pulling money out of the market.
Image source: Getty Images.
The case for Zillow Group
I'm going to say something pretty contrarian here: I'm glad that Zillow got out of the home-flipping business. I realize that the market generally doesn't agree. The company's shares took a 23% hit in a single day when management announced that it would be winding down its Zillow Offers program, and that wasn't a transient reaction. The stock is now down by 45% since Zillow announced its strategic shift, and off by a staggering 78% from last year's all-time high.
Still, I'm glad to see this company refocusing on its core competencies, even if it has been pummeled by the market. To be frank, Zillow just wasn't very good at iBuying. You'd think that it would excel considering the massive breadth of real estate information it holds, but the numbers told a different story. Even with its finger on the pulse of the house-hunting market, Zillow was losing money at institutional home flipping -- iBuying became a source of weak-margin revenue that inflated its top line while squeezing its bottom line.
It also created a conflict of interest with its flagship business. Zillow counts on real estate professionals as premium subscribers to its Premier Agents platform, and it tried to work with them through Zillow Offers, but it must've been upsetting to many of those agents to see the company try to flip homes in their local markets.
The business that will be left is so much better. This is the real estate data giant that also owns Trulia, as well as rental platforms StreetEasy and HotPads. Now, it can focus again on taking its 227 million monthly unique visitors and using them to generate leads for its Premier Agents, while also cashing in on connecting people with mortgage pre-approvals, mortgage financing, and closing, title, and escrow services. This is already a strong business. If you back out Zillow Offers, the company would've been very profitable, and delivered 37% revenue growth through the first three quarters of 2021.
Zillow is taking one step backward to take several steps forward. Wall Street just hasn't realized it yet.
The case for Twilio
Twilio has been one of my favorite companies for years, and with the stock tumbling -- like so many other great long-term growth stocks are right now -- its appeal finally overcame my concerns about its high valuation.
Whether or not you've ever heard of Twilio, you've likely used its services. It's the leading provider of in-app communication solutions. So, when your ride-hailing driver lets you know that she's four minutes away, she's doing so with the help of Twilio. Or, if you're resetting passwords, checking on a vacation rental availability, or chatting back and forth with a merchant following an online marketplace transaction, the odds are good that's Twilio in action, too.
The company's growth rates have been stellar, and the pandemic has only made us even more dependent on our smartphones. Reported revenue soared 65% in Twilio's latest quarter. Some acquisitions over the past year helped enhance those results, but organic year-over-year revenue growth still clocked in at a respectable 38%. Developers love Twilio, and with a dollar-based net expansion rate of 131%, its average returning app maker is spending 31% more on Twilio now than it did a year ago.
The stock is leaving January trading at an enterprise value that is just 11.6 times its trailing revenue. That's not textbook cheap, but it's a lot lower than its historical valuations.
The case for ZIM Integrated Shipping Services
If you pull up the stock data on ZIM Integrated Shipping Services, your jaw will drop. Shares are trading for just 2.3 times trailing earnings -- yes, earnings -- and its dividend yields a massive 15.3%. Admittedly, the view on a forward-looking basis isn't quite as attractive, but you're still likely to appreciate the value that ZIM brings to the table.
ZIM is an Israeli-based provider of international container shipping and related services. Last year was pretty wild for companies involved in shipping goods in containers across the oceans. A combination of supply chain shortages and panic buying left businesses paying top dollar for transportation services. Things should start to normalize here, but ZIM is still going to be a cheap stock with a pretty juicy dividend.
The few analysts covering ZIM can't keep up. Three months ago, the average forecast was that its earnings would fall to $12.94 a share for all of 2022. Now, they've almost doubled that consensus figure to $24.63 a share. ZIM has trounced analysts' profit targets for the last three months, so momentum is clearly with the bulls. The forward earnings outlook is lower than its actual trailing earnings -- for now -- but it still values the stock at a tempting price-to-forward-earnings multiple of 2.7. Analysts are also forecasting a profit of just $11 a share for 2023, but we've seen how quickly they can revise those estimates upward.
As for the dividend, management will naturally trim it as profitability starts to contract. Even so, it's still going to be hefty. ZIM recently shifted to quarterly payouts, and to a policy of paying shareholders at a rate that's variable depending on earnings. It will pay roughly 20% of each quarter's earnings as a quarterly dividend, and distribute at least 30% of its full-year income annually.
There are natural risks inherent to owning international stocks, and when investing in Israeli companies, extra geopolitical considerations may apply. Container shipping is also highly cyclical in terms of revenue, and even more so on the bottom line. Container freight rates aren't likely to stay this high, but ZIM's stock is too cheap to ignore even as its business starts to settle back down to something closer to normal.
