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Why this small cap share tumbled 7.5% lower today

The McGrath Ltd (ASX: MEA) share price has had a disappointing start to the trading day.

In early trade the real estate company’s shares are down 7.5% to 31 cents.

Why are McGrath’s shares tumbling lower?

This morning McGrath released a trading update for the three months ended September 30. During the first quarter of FY 2019 the weakening housing market had a negative impact on the company’s performance.

In the first quarter the company saw auction clearance rates and the number of properties taken to auction falling below the previous year, an increase in the level of stock on the market with lower buyer activity, and a reduction in the number of settled sales.

According to the release, in the 12 months to September 2018, the number of settled sales in Sydney, Melbourne, and Brisbane markets have fallen 18.5%, 15.8%, and 11% respectively.

The release explains that: “Despite agent numbers and listing numbers growing quarter on quarter over the past nine months within the McGrath network, properties are taking longer to transact due to the softening market conditions. Average Days on Market for McGrath Company Owned offices in Q1 was 42 days, compared with an average of 34 in the FY18 corresponding period. Days on Market for the McGrath network in Q1 was 54 compared with an average of 47 in the FY18 corresponding period.”

As a result, the company posted an EBITDA loss of $1.9 million during the first quarter. It has also forecast another smaller loss in the current quarter.

Looking further ahead, management is optimistic that things will improve in the second half and expects to at least breakeven on an EIBTDA basis for the full year.

Should you invest?

I don’t think investors will be overly surprised with this news. You only need to look at the way its shares have trended lower since the start of the year to see how expectations have been becoming more and more subdued as the months go by and house prices soften.

Unfortunately, the way the housing market is looking right now, I wouldn’t be surprised if McGrath’s performance deteriorates further in the coming years unless there is a major rebound in house prices.

Because of this, I would suggest investors stay clear of McGrath and rival Domain Holdings Australia Ltd (ASX: DHG) for the time being.

I would, however, consider REA Group Limited (ASX: REA) at these prices due to its growth opportunities from depth advertising, pricing power, and international exposure.

Alternatively, this top growth and dividend share continues to kick goals in FY 2019.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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