CoStar Group (CSGP) – Closing Short Position – up 210% vs. S&P up 81%
We made CoStar Group (CSGP: $85/share) a Danger Zone pick on July 17, 2017. At the time of the report, CSGP earned an Unattractive rating. We felt the firm’s roll-up acquisition strategy destroyed shareholder value, balance sheet inefficiency drove down profitability, and an expensive valuation created dangerous risk/reward.
This report, along with all of our research, leverages our more reliable fundamental data to get the truth about earnings, as shown in the Journal of Financial Economics paper, “Core Earnings: New Data and Evidence.”
During the 4+ year holding period, CSGP underperformed as a short position, rising 210% compared to an 81% gain for the S&P 500.
CoStar Group effectively combined its numerous acquisitions, leveraged its proprietary database of commercial real estate information, and expanded its rental platform to build a consistently profitable business. The firm’s Core Earnings improved from $16 million in 2010 to $274 million in 2020 and ROIC is up from 1% in 2015 to 10% over the TTM. CoStar Group must still improve its current margins to all-time highs and grow at consensus estimates for a decade to justify the current stock price, so it’s not cheap.
However, since it’s more difficult to make a case to short the stock given the improving fundamentals, rising demand for rental properties, and the expected rebound in commercial real estate post COVID-19, we’re closing this short position.
Figure 1: CSGP vs. S&P 500 – Price Return – Unsuccessful Short Idea
Sources: New Constructs, LLC and company filings
Note: Gain/Decline performance analysis excludes transaction costs and dividends.
This article originally published on August 13, 2021.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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