Zillow’s potential in the real estate space remains big

Author: Barry Randall, Crabtree Asset Management

Covestor model: Crabtree Technology

The month of March was a good one for the Crabtree Technology model. First, we completed in early March the re-balancing (begun in February) of the model with the sale of Sykes Enterprises (SYKE) and Vicor (VICR), the trimming of our OSI Systems (OSIS) position, and the addition of Nippon Telephone (NTT) and Zillow (Z). Of the latter two, it’s worth mentioning that NTT comes from our quantitative model, but Zillow is one of our rare model exceptions.

We discussed Zillow at length in our February investor letter, so we’ll simply reiterate that we believe the site is a desired monopoly in the real estate information space. We also expect Zillow to slowly expand its capabilities to become a kind of “environmental graph;” charting and presenting information (e.g. air quality, crime rates) about where we live and work and play.

Zillow so far has rewarded our confidence by rising from our March 2nd $30.80 purchase price to $35.59 as of the market close on March 31. (The stock was at $35.83 as of 4/19) Of course, that’s a very short time frame and is unduly influenced by headlines and overall market strength. But underneath, the company has continued to execute and we’re looking forward to Zillow’s first quarter earnings announcement in early May.

Overall, March was an improvement from our disappointing February. Whether March performance was driven by “noise” or  “signal,” it was good either way: The Technology model rose 4.0% during the month, slightly better than our internal benchmark, the Merrill Lynch Technology 100 (MLO), which rose 3.4% during the same period. Covestor also compares the Crabtree Model to the Nasdaq 100 Index (NDX), which rose 5.0% during March.

April will bring with it the first quarter “earnings season,” as most public companies announce their financial performance for the first three months of 2012. For Crabtree, April is already off to a good start, with the buyout of one of our holdings, Brazilian phone company Tele Norte Leste Participacoes (TNEM). You can reasonably expect that by the time you read our next monthly recap, we’ll have sold Tele Norte and re-deployed the proceeds into another position. We just ran our quantitative model again at the end of March, so we have no shortage of potential investments from which to choose.