A Unique Bond Rally Play
Featuring Dan Russo
Published on: September 5th, 2019 • Duration: 9 minutesDan Russo, CMT, chief market strategist at Chaikin Analytics, presents a unique real estate analytics company as a way to play the rally in bonds. In this interview with Jake Merl, Russo walks through the bullish signals from his proprietary model, discusses how much upside he expects for the stock, and notes key risks to the trade. Filmed on September 4, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Dan Russo, Chief Market Strategist at Chaikin Analytics. Dan, great to have you back on the show.
DAN RUSSO: Great to be back, Jake. Thanks for having me.
JAKE MERL: Today, we're going to be talking about bonds. We witnessed an epic rally in Treasuries over the past 6 months, the 10-Year is currently trading below 1.5%. What are your thoughts, Dan? Do you think this bond bull market will continue?
DAN RUSSO: I think that there's actually scope for rates to continue to move lower. I've been in here in the past, and I've spoken about my view that in a slowing growth environment, it would become very difficult for the Federal Reserve to raise rates. Subsequent to that, the Fed has come out and cut 25 basis points and expectations are for further cuts throughout the rest of this year so I think the path of least resistance for the 10-Year Yield and other yields across the curve here in the US is to the downside. The reason I think that that's the case is because if we look globally, there's about $16 trillion in debt currently trading with a negative yield so all of a sudden, our 1.45%, 1.5% 10-Year Treasury Yield doesn't look that bad.
Do I think we're going to go there in a straight line? Absolutely not. We could see some backing and filling and some backing up in the rate, but if you look at the 10-Year Yield purely from a technical standpoint, below a severely declining 50-Day Moving Average, below a severely declining 200-Day Moving Average, if I take an RSI of the 10-Year Yield as a measure of momentum, it is embedded in bearish ranges, meaning it routinely becomes oversold with readings below 30 and on rallies really can't become overbought, really doesn't even get much above the 50, 60 mark. That tells me that there's momentum to the downside and the path of least resistance for yields here in the US is likely lower.
Now, we're an equity research shop. What does that mean for the equity markets? What I like to do is look for derivative plays and opportunities off of what is happening across asset classes to see the best opportunities in the equity market. Obviously, when you hear lower rates, you immediately think real estate, you immediately think utilities, and while that's the consensus view, I like to think a little bit outside of the box.
Real estate as a group, if we look at the XLRE, the SPDR real estate ETF is outperforming the market. It actually has a bullish rating in our model. We have a 20-factor model that looks at over 4000 US listed equities and we can then take that model and apply it to the holdings of specific ETFs. If we look in the XLRE, there are more bullish stocks based on our model than there are bearish stocks. XLRE is in a nice steady uptrend above our measure of long term trend and it's been outperforming the market with the intensity of that outperformance increasing lately, so obviously, real estate is an area of the market that you want to be.
One of my other views is that in a slowing growth environment, investors are likely to pay a premium for growth. I started to think about opportunities that play on both of those themes, falling rates, so real estate leverage and then growth. I immediately come to technology and I find a name, CoStar Group, the ticker symbol is CSGP. It has a bullish rating in our model. It's been outperforming the market predominantly since the beginning of the year, in January.
What CoStar does is they are an information technology company to the real estate industry, in particular, commercial real estate. In financial markets, we all know Bloomberg is a go-to source for information. On the commercial real estate market, that go-to source is CoStar. CoStar is an interesting way to get leverage to real estate while also having leverage to the growth theme as global growth slows.
JAKE MERL: Does CoStar Group trade more like a real estate stock or a tech stock?
DAN RUSSO: Well, if you look at the valuation, clearly, it trades more like a tech stock, but it is levered to that real estate sector.
JAKE MERL: At Chaikin Analytics, I know you have a 20-factor model and I know that's giving you a bullish signal for this stock. What are the particular factors you're looking at that's giving you that bullish rating?
DAN RUSSO: We look at four main groups-- financials, earnings, technicals, and what we call expert opinion, which I like to think of as sentiment. We look at factors such as earnings growth, earnings momentum, earnings surprise. We do take valuation factors into account, so price to sales and price to book. If you look strictly on valuation metrics, CoStar's not going to screen well. It is an expensive stuff, but the other three categories are all bullish or very bullish within our model.
On top of that, we overlay technicals from a trend perspective. It's in a nice steady uptrend, actually reported solid earnings and a positive earnings surprise back in July. Stock is now consolidating above our rising long term trendline. When the model is bullish, the next thing that we look for is relative strength. How is the stock doing relative to the broader market? Stock's been a steady outperformer, as I said, since the beginning of the year, so I view this consolidation as an opportunity to get involved on the long side of a name like CoStar.
In particular, our proprietary overbought/oversold indicator that's designed to tell us whether a stock is overbought or oversold within the context of its existing trend is now on an oversold reading. What that tells me is the stock is oversold within the context of an uptrend. Chaikin money flow for this stock has been persistently bullish since the beginning of the year. That tells us that the stock is under accumulation, so when I take that holistic view of CoStar, it looks pretty compelling to me as a bullish idea.
JAKE MERL: How does the bullish rating actually translate into your outlook for the stock price? What do you expect for the stock price over the next 3 to 6 months?
DAN RUSSO: That's exactly the timeframe that we look at, the 3- to 6-month timeframe, and the model is designed to be forward looking. Stocks with bullish or very bullish ratings are more likely to outperform the market over the next 3 to 6 months. Then when I take that and layer in the fact that the stock is outperforming, we get that momentum element, and it leads me to believe that the weight of the evidence supports the stock continuing to outperform.
JAKE MERL: How much upside are you expecting?
DAN RUSSO: Stock closed yesterday at $611. I see upside to $700. From a risk management standpoint, I like to look at risk using volatility based stops. Average true range is my go-to risk metric parameter and three times the average true range for CoStar gets you a stop at $572 based on last night's close.
JAKE MERL: You mentioned that valuation was an issue with this stock. It's not cheap. It's actually almost doubled since its December lows from late last year. Does that worry you at all?
DAN RUSSO: The fact that it's doubled since late last year doesn't worry me. I like to look at stocks that are going up. I believe in the concept of momentum that stocks that have been outperforming will tend to continue to outperform over the intermediate term timeframe. The rally doesn't bother me. As I think about risk management and what could hurt the stock is if the market does break down. If we start to see signs of a recession that could potentially impact the commercial real estate market, obviously, a high valuation stock like CoStar will be one of the first names to get hit and likely get hit harder than the rest of the market, which is why we always think in terms of where is our risk and always identify a level that says we're wrong. Right now, that level's $572.
JAKE MERL: Well, Dan, we'll see how it plays out in the next 3 to 6 months. Thanks so much for joining us.
DAN RUSSO: Thanks for having me.
JAKE MERL: Dan is bullish on real estate. Specifically, he suggests buying CoStar Group, ticker symbol CSGP, at current levels, with the stop loss at $572 and a target price of $700 over the next 3 to 6 months.
That was Dan Russo of Chaikin Analytics and for Real Vision, I'm Jake Merl.