We recently compiled a list of the 14 Worst 52-Week High Stocks to Buy According to Short Sellers. In this article, we are going to take a look at where Redfin Corporation (NASDAQ:RDFN) stands against the other 52-week high stocks.
The start of the US Federal Reserve cutting cycle ushers a new era in the investment world after one of the longest bull runs. Major US Indices are at record highs, well supported by an economy that has shrugged off the adverse effects of high interest rates. A resilient economy has been the catalyst behind companies delivering better-than-expected results, helping shore up sentiments in the equity markets. With the S&P 500 at record highs, so are stocks trading close to 52-week highs on valuations that are getting out of hand.
READ ALSO: 12 Best Forever Stocks To Buy Now and 12 Best Long-Term Stocks to Buy According To Warren Buffett.
The first interest rate cut comes amid growing concern about a slowing US economy depicted by weakness in the labor market, slowing manufacturing, and weak consumer purchasing power. The impact of high interest rates for a long time is already being felt on consumer purchasing power taking a hit to the detriment of small and medium businesses.
Likewise, Ray Dalio the founder of Bridgewater Associates believes the Fed faces a tough balancing act as it commences the cutting cycle. In an interview with CNBC, Dalio reiterated that the Fed must find a way to keep interest rates high to prevent inflation edging higher and keeping them low enough to offer support to an economy that is facing an enormous amount of debt.
While there were fears that a steeper interest rate cut could be the worst outcome for stocks on fueling concerns about the economy’s health; that has not been the case. The upward momentum in the equity markets appears to have gathered steam depicted by the S&P 500 at all time highs after the cut.
Disappointing economic data in recent months has been the catalyst behind BTIG analyst Jonathan Krinsky reiterating that the risk-reward in the near term is now skewed to the downside regardless of what the Federal Reserve does. The sentiments come amid concerns that the Fed might have waited too long before cutting.
According to Krinsky, consumer staple stocks remain the most susceptible to significant downside risk. That’s because it is one of the sectors that has felt the full brunt of high interest rates taking a toll on consumer purchasing power.
On the other hand, the real estate sector, especially home-building stocks, could be big winners on the Fed cutting by 50 basis points. In the three months leading up to the rate cut cycle, homebuilders stocks outperformed the S&P 500, and building materials have also seen success. Over the last quarter, shares of homebuilders have risen by 26%, while building materials have seen a 13% increase, in contrast to the S&P 500, which has only gone up by 2%.
Shaniel Ramjee, who co-leads the multi-asset division at Pictet Asset Management’s London branch, mentioned that his group has been purchasing shares of U.S. financial firms in the past few weeks in preparation for expected interest rate reductions.
The analyst is confident that the financial sector will gain from a steepening yield curve due to increased support from lower interest rates for consumers and greater economic activity when interest rates are reduced.
Stocks trading near the 52-week highs could face pressure as valuation scrutiny gathers momentum. Uncertainty over the upcoming US presidential election could also weigh significantly on overvalued stocks trading close to their 52-week highs. Consequently, now could be the best time to pay attention to stocks that are trading near their 52-week highs and are moderately shorted.
Our Methodology
We used the Finviz stock screener to scan for companies that are trading near their 52-week highs and have high short interest. We identified 25 stocks that fit our criteria and then picked the 14 that were the most popular among elite hedge funds. The stocks are ranked in ascending order, based on their short interest.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A skyline view of a bustling city, representing the company’s presence in the real estate market.
Redfin Corporation (NASDAQ:RDFN)
52 Week Range: $4.26 – $15.29
Current Share Price: $13.90
Short % of Shares Outstanding: 16.93%
Number of Hedge Funds holding stakes as of Q2 2024: 20
Redfin Corporation (NASDAQ:RDFN) is a real estate company that operates an online real estate marketplace and processes real estate services, including assisting people in buying and selling properties. The company also uses digital platforms to connect consumers with rental properties.
In 2021, nearly half of Redfin Corporation (NASDAQ:RDFN)’s revenues were generated through iBuying, a business that involved buying houses from sellers who were ready to sell them with the goal of making a profit by reselling them. However, the business became risky with the rise in interest rates to record highs.
Currently, Redfin Corporation (NASDAQ:RDFN) is concentrating on its range of services, which encompass property brokerage, mortgage services, and closing services. The firm has 1,719 lead brokers on staff, representing 0.77% of all properties sold in the US during the second quarter of 2024. Additionally, over a quarter of Redfin’s clients also utilized Redfin for their mortgage needs during this period, enabling the company to generate more income from each mortgage deal.
Even though the service business boasts a high gross margin, it is susceptible to an overheating real estate market that is crumbling amid the high interest rates. With few homes changing homes, given the reduced consumer purchasing power, the company is starting the risk of its revenue and earnings taking a significant hit.
With sales remaining sluggish because of high home buying costs that make both house hunters and prospective sellers skittish, investors are becoming increasingly skeptical about the company’s prospects amid the high interest rate environment.
Until mortgage rates drop to a level that can trigger a high rate of home buying, Redfin could remain under pressure, which explains the high short interest rate of 16.93%. According to Insider Monkey’s second quarter database, 20 hedge funds were bullish on Redfin Corporation (NASDAQ:RDFN), compared to 18 funds in the prior quarter.
Overall RDFN ranks 4th on our list of the worst 52-week high stocks to buy according to short sellers. While we acknowledge the potential of RDFN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RDFN, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.