Why Josh Brown bought this real estate stock that's down more than 50% from its highs

Published Fri, Aug 20 20211:43 PM EDTUpdated Fri, Aug 20 20213:32 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Money manager Josh Brown just bought for his personal portfolio a real estate stock that's tumbled more than 50% from its all-time high in February. Appearing Friday on CNBC's "Halftime Report," the CEO of Ritholtz Wealth Management said he started a position in Zillow because he believes in the company's long-term ability to capitalize on the growing digitization of real estate services. The investor is particularly bullish about the potential for Zillow to continue developing its so-called iBuying platform known as Zillow Offers. Still, Zillow shares may have further room to fall in the near term, Brown cautioned. The stock traded just below $95 intraday Friday. That's down sharply from its peak Feb. 16, when it broke above $208. For the year, Zillow shares are down more than 27%. "I bought about a third of, I think, the ultimate amount I'll have. I don't want to give people the idea that I think Zillow has definitely bottomed. ... I've been stalking this stock since $120. It is absolutely still a falling knife and still in a very well-defined downtrend, but it's cheap enough for me at this point," Brown said. "I think it's one of the best web companies in the world, quite frankly, and I love what the strategy is transforming this company into it," he added. Zillow has benefited from the red-hot housing market that developed last year during the coronavirus pandemic. The company's total revenue rose 22% on a year-over-year basis in 2020 and 33% in the first six months of 2021. Zillow Offers, which is essentially the company's house-flipping segment, saw 25% revenue growth in 2020 compared with 2019. Through June 30 of this year, revenue from Zillow Offers jumped 20%. First announced in 2018 , starting with just two geographic markets, Zillow Offers moved the company beyond being an online real estate marketplace and brought into the business of buying homes directly from sellers. It's now available in 25 markets around the U.S., ranging from Tucson, Arizona, to Atlanta to Miami. "We dream one day of you having an almost trade-in experience with your house," Zillow co-founder and CEO Richard Barton told CNBC in 2019 . Brown is a believer Zillow's ambitions. "Everyone knows the real estate mania driven by the pandemic is not, like, a forever thing and eventually will go back to trend," Brown said, offering an explanation for the steep pullback in the stock this year. "If it goes lower, I'll be buying more," he added. However, on more broad level, Brown said he feels Zillow's business is not fully understood by Wall Street. "It's like nine companies in one," the investor said. "Zillow three years ago was basically selling leads to Realtors, and then they decided they want to get involved in the transactions themselves, so they're doing the mortgage business, which is the ultimate no-brainer," Brown said. "But the bigger business, and I think the business that's going to take over this whole company, is the iBuying." In the second quarter of this year, Zillow bought roughly 3,800 homes through its Offers segment. It sold just over 2,000 homes, CEO Barton said on the company's earnings call, according to a FactSet transcript. "That business has the potential to be explosive when you consider how much people hate the process of buying a house," Brown said. "They're not the only player doing it, but they are the biggest. I think they'll be the best, and that's why I want to get into the stock, because of this big drawdown and what I think is a misunderstanding." Watch the full clip of Josh Brown explaining his decision to buy Zillow shares above.

Josh Brown

Adam Jeffery | CNBC

Money manager Josh Brown just bought for his personal portfolio a real estate stock that's tumbled more than 50% from its all-time high in February.