The Nasdaq-100 technology index is still recovering from a brutal 2022, when it plunged 33% into bear territory. But down years are quite rare: In the 37-year history of the index, it has delivered an annual loss only seven times.
Consecutive losing years are even less likely to occur. In fact, only the dot-com bust from 2000 to 2002 produced back-to-back annual drops in the Nasdaq-100.
True to history, the index has bounced back in 2023 with a powerful gain of 47% so far. But it gets better, because the data suggests once the Nasdaq-100 turns green, it tends to spark a roaring bull market.
There have been four bounce-back years for the Nasdaq-100 since 1986, and the index continued to rally for an average of 6.5 years on each occasion.
Fundamentals should push the Nasdaq-100 higher
Inflation hit a 40-year high in 2022, which prompted the U.S. Federal Reserve to hike interest rates at the fastest pace in its history. In the space of just 18 months, the federal funds rate soared from a historic low range of 0% to 0.25% all the way to the current range of 5.25% to 5.5%.
The move forced a change in investors' appetite for risk. Fast-growing companies that thrived on low interest rates became less attractive, which sent their stock prices lower. Plus, investors could suddenly earn attractive returns on risk-free assets like deposits and U.S. government Treasury bonds. Again, that was bad news for stocks.
Data source: YCharts.
But the landscape has begun to shift yet again. Most experts believe the Fed has finished raising interest rates, and markets are pricing in five rate cuts in 2024. That could reignite spending among consumers and businesses alike, which would be great for corporate earnings, and fuel more upside in the stock market.
Below, I'm going to share one stock that could deliver substantial returns if that scenario plays out.
The beaten-down real estate sector presents an opportunity
The real estate sector has been crushed by the rapid rise in interest rates. The latest data on sales of existing homes points to the weakest housing market since 2010, with just 3.79 million homes expected to change hands this year.
Homeowners are reluctant to sell because when they purchase a new place, they will have to take on a mortgage with a much higher rate. Similarly, buyers are forced to bide their time because their borrowing capacity has been crimped by the higher rates.
However, those trends are set to reverse starting in 2024, and real estate technology company Redfin (RDFN +0.00%) could be one of the biggest winners. Its stock has already soared 68% in just the past month as a growing chorus of experts started calling for lower rates going into the new year.
The stock is still down 92% from its all-time high, and here's why that's a buying opportunity.
NASDAQ: RDFN
Key Data Points
Redfin is building an impressive portfolio of real estate services
Real estate brokerages are Redfin's bread and butter. The company employs 1,744 lead agents who serve 98% of the U.S. population, and in the recent third quarter of 2023 (ended Sept. 30), they represented 0.78% of all homes sold across the country.
That scale allows the company to charge listing fees as low as 1%, instead of the industry standard 2.5%. That means the seller saves money and Redfin attracts more listings, making it a win-win for both parties.
And it is also rapidly penetrating the rental market. Its revenue in that segment grew by 23% year over year during the third quarter, which was an acceleration over the previous quarter. It's helping to offset some of the weakness in home sales.
A record-high 51.3 million people visited Redfin's online platforms each month during the third quarter, which will be crucial as the real estate business continues to trend toward digitization.
And it acquired Bay Equity Home Loans last year to further expand its portfolio of services. Since then, its mortgage attach rate has grown to 18% -- which is the percentage of buyers who use Redfin to both purchase and finance their home.
Image source: Getty Images.
Redfin stock is attractively valued right now
Redfin is on track to deliver $1.1 billion in revenue for 2023. At face value, that's a 52% drop compared to 2022, but it's because the company exited its iBuying business late last year. It involved purchasing homes directly from willing sellers and attempting to flip them for a profit, and it accounted for almost half of Redfin's revenue.
However, with real estate prices stagnating due to higher interest rates, iBuying became far too risky.
Now, Redfin is focused on its portfolio of services I discussed earlier, which are low-cost businesses with a higher gross margin. In the recent third quarter of 2023 (ended Sept. 30), they helped the company deliver an adjusted profit of $7.6 million on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), swinging from a loss in the year-ago period. And it recently refinanced its corporate debt due in 2025, so it now has until 2027 to continue building on that profitability milestone.
Redfin is valued at $889 million as of this writing, and based on its estimated $1.1 billion in 2023 revenue, its stock trades at a price-to-sales (P/S) ratio of just 0.8. That's near the cheapest level since the company went public in 2017, and it's a long way from its peak P/S of 7.7.
Wall Street analysts don't think Redfin will deliver any revenue growth in 2024, hence the rock-bottom valuation. But they might be far too pessimistic.
In an announcement on Nov. 30, the company told investors that mortgage repayments had declined for five straight weeks. It's because mortgage rates have already begun to fall in anticipation of a steady (or lower) federal funds rate.
In that same announcement, management said new listings jumped 6% for the week on a year-over-year basis. It was the largest increase in over two years.
Those are great signs that the housing market is already thawing, and Redfin is in a fantastic position to benefit. At its current stock price, this could be one of the best long-term buys if history repeats itself and the Nasdaq-100 enters a multiyear bull market.
