Why You Should Scrap Zillow Group (Z) From Your Portfolio

If you still have shares of Zillow Group, Inc. (NASDAQ:Z) in your portfolio, it is time you dump them as chances of favorable returns in the near term are bleak.

This is because the stock registered a negative return of 3.1% in the last three months, underperforming the Zacks categorized Real Estate – Operations’ increase of 1.9%.

What Are the Concerns?

Zillow Group offers real estate and home-related brands on mobile and web.

Analysts have become increasingly bearish on this stock with the only analyst covering the stock revising the estimate downward. With no upward revision in the last 60 days, the Zacks Consensus Estimate for fiscal 2017 declined from 75 cents to 45 cents per share. This indicates a decline of 40%, indicating tepid prospects for the company.

Zillow Group currently has a trailing 12-month Price/Book Value (P/B) ratio of 1.72. This level compares unfavorably with what the industry saw over the last one year. The ratio is higher than the average level of 1.65 and is toward its higher end of the valuation range over this period. Hence, valuation looks slightly stretched from a P/B perspective.

Currently, this real estate company carries a Zacks Rank #5 (Strong Sell). Also, the company has a very poor VGM Score of “F.” Notably, the Zacks VGM Style Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum, across the board. Stocks with a VGM Style Score of ‘A’ or ‘B’ and a Zacks Rank of #1 (Strong Buy) or 2 (Buy), have even better returns, on average, than the individual components, as it considers three times as many items that are correlated to future stocks returns.

Adding to the woes, last quarter, the company posted a negative earnings surprise of 64.3%. Moreover, combined with other unattractive features like low return on equity (ROE) and low return on assets (ROA), the stock looks very unattractive. Zillow Group currently trades at a negative ROE of 6.9% compared with the industry’s average return of 6.8%. Notably, the company has a negative ROA of 5.8% compared with the industry’s average gain of 2.3%.

Going forward, the company is currently in the high investment phase and therefore profitability might be an issue in the near term. Competition from peers also remains a headwind.

Bottom Line

We expect the aforementioned factors to hurt the company’s near-term profitability. Hence, we recommend investors to stay away from Zillow Group shares until the Zacks Rank, VGM score and estimates improve.

Stocks to Consider

Few better-ranked stocks in the broader technology sector are Lam Research Corporation (NASDAQ:LRCX) , Broadcom Limited (NASDAQ:AVGO) and Computer Sciences Corporation (NYSE:DXC) , all three sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research, Broadcom and Computer Sciences have a long-term expected earnings growth rate of 12.34%, 13.6% and 8%, respectively.

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