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What you need to know about REA Group Limited’s (ASX:REA) share price surge

It takes more than a tech stock rout and crashing property prices to put off shareholders in our largest online real estate classifieds group REA Group Limited (ASX: REA).

REA Group’s share price jumped 3% to $74.35 in after lunch trade as its annual general meeting (AGM) kicked off in Melbourne.

The REA share price gain is even more impressive given that the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index shed 0.5% of its value as nervous investors look to shed risk assets.

US tech stocks were hardest hit in this risk-off environment and only defensive sectors on the ASX, like consumer staples and healthcare, are trading in the green at the time of writing.

No news is good news

The lack of bad news at the AGM has cleared the way for the stock to trade higher after its close to 8% drop over the past two weeks.

Several companies have been using the AGM season to warn of earnings and sales misses such Pact Group Holdings Ltd (ASX: PGH), Aveo Group (ASX: AOG), James Hardie Industries plc (ASX: JHX) and Lendlease Group (ASX: LLC).

REA Group reminded shareholders today that the ongoing property market downturn isn’t hurting its bottom line with FY18 net profit jumping 23% to $279.9 million as management shelled out 20% higher dividends for the year.

If anything, the property slowdown has prompted property developers to up their spending on advertising and marketing and REA is capturing the lion’s share of the increased spend compared to the number two rival Domain Holdings Australia Ltd (ASX: DHG).

If there were any cracks in REA Group’s armour, management would be obliged to confess and the silence means the group is probably on track to meet consensus forecast of an 18% increase in earnings per share (EPS) for FY19.

But this isn’t the only dot-com stock that’s outperforming. The Carsales.Com Ltd (ASX: CAR) share price and the SEEK Limited (ASX: SEK) share price are both trading higher as well.

Is the REA stock cheap?

The fact that REA Group’s share price performance over the past year is roughly in line with the top 200 stock index could tempt investors to buy the stock at current levels. After all, there won’t be many other large-cap companies on the ASX that can match or beat its expected earnings growth in the current financial year.

But it’s not FY19 results that I am concerned about. A protracted downturn in our property market will likely see property vendors cut ad spending to preserve cash.

As it stands, property forecasters do not believe we will see a market recovery until 2020.

What’s more, REA Group’s exposure to the Chinese and US property markets could come back to bite it. The Chinese economy is looking shaky in light of the escalating trade war with the US, while the US housing market has slowed significantly due to rising interest rates.

I am sitting on the fence when it comes to REA Group but this isn’t to say there aren’t better opportunities in the tech space.

If anything, the experts at the Motley Fool believe you should be putting these stocks on your watchlist for 2019.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK 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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