You might think I'm mad buying shares in realestate.com.au owner REA Group Ltd (ASX: REA) when the company sports a trailing P/E ratio of more than 36x, but that's exactly what I did last week.
Shares in the real estate group are now in correction territory – having fallen 12% in the past week alone. (A correction is defined as a fall of 10% or more). Traders would likely be running for their lives before their stop losses caught up with them – after all, who wants 'catch a falling knife'.
Simple. Me.
It's called Foolish investing, and it's taking advantage of stocks on sale. In this case investors are worried that market leader REA Group is under increasing pressure from Fairfax Media Limited's (ASX: FXJ) Domain property group, and the strong growth the company has delivered over the past decade is coming to an end.
Add in fears of a crash in the overheated property markets in some capital cities – namely Sydney and Melbourne, driven by the ultra-low interest rates and you have all the makings of a great deal of fear.
Which is lovely of course for Foolish investors.
As Warren Buffett has stated, "Be greedy when everyone is fearful… ". Hard to do in practice, but one way of generating significant returns for your portfolio.
Has the market over-reacted to the 'perceived' threats to REA Group's business? Quite likely. Will REA Group continue to dominate the Australian real estate advertising market? Quite likely too.
When a high-quality company like REA Group can generate earnings growth of 30% over the past nine months, despite Australian residential listings volumes down 7.2% in the last quarter, I'm also happy to pay a premium price for that.
One thing REA Group can also boast that Domain lacks is international exposure, including 5 sites in Europe, 20% of Move in the US, brought together with REA's 62% shareholder News Corp (ASX: NWS) and a 19.9% holding in iProperty Group Ltd (ASX: IPP) which is rolling out real estate platforms across South East Asia. Europe and iProperty are both growing strongly while the jury is out on the Move acquisition so far.
IF REA Group can achieve 30% growth in the second half of this year over the first, that P/E ratio of 36x I mentioned earlier is likely to fall to just over 25x. What's not to like about that?
