• American Homes for Rent has a "moderate-buy" rating for some interesting reasons.
• Legacy Housing has an upside of 50.03% and is worth consideration.
• Equity Residential is down but still profitable, and has a key trait that institutional investors look for.

Small-cap Compass (NYSE: COMP), which runs an end-to-end platform for buying, selling, and renting real estate, lost its way Thursday, drifting more than 6% lower in heavy volume after announcing layoffs.

Compass has been in a death spiral since its IPO in April, 2021. Soon after it went public at $18, the broader market wobbled, and Compass followed along. The stock attempted a rally in August. However, the odds were stacked against a rally, as the broader enterprise software industry, as well as real-estate stocks, such as homebuilders and real estate investment trusts, also hit the skids in August of 2021.

Compass closed Thursday at $2.29. Its market cap stands at $989 million, a big fall from grace after its $7.2 billion valuation at the time of its IPO.

The company has never been profitable, and Wall Street has no expectations for that to change anytime soon.

In and of itself, a failed IPO (at least for the moment) isn’t something to get worked up about.

What’s Ahead For Real Estate Stocks? 

But is Compass a bellwether for what’s ahead for various real-estate-related stocks? Given the Federal Reserve’s series of rate hikes, and with more expected, the cost of mortgages is on the rise. Already, mortgage applications are down 23% from a year ago, according to the Mortgage Brokers Association. 

Given that scenario, It’s not exactly a shock that homebuilders such as D.R. Horton (NYSE: DHI) are slumping. 

But what about the much-vaunted rental trade? You might think that if mortgages are getting tougher and tougher for Americans to afford, publicly traded operators of rental properties must be sitting pretty, right? 

In one sense, yes. For example, take American Homes For Rent (NYSE: AMH). The California company acquires, renovates, and leases single-family homes. It owns more than 57,000 rental homes in 22 states.  

American Homes has posted double-digit revenue growth in the past five quarters and double-digit earnings growth in the past six. Analysts expect earnings to grow 16% for the full year, to $1.41 per share. Next year, that’s seen rising to $1.57 per share, which would be an additional 11% growth. 

However, if you’re going by just the chart action, you’re seeing a familiar sight: A stock that’s down in recent months and can’t get much upside traction. American Homes is down 20.94% year to date. 

The picture may not be so bleak, though. According to MarketBeat analyst data, Wall Street has a “moderate-buy” rating on the stock with a price target of $42.07, a potential upside of 23.67%.

Potential In Housing REITs

Turning to another segment of the non-traditional single-family-home industry, Legacy Housing (NASDAQ: LEGH) has been growing earnings at a fast clip. Per-share income increased between 17% and 57% in each of the past eight quarters. Revenue hasn’t been quite as strong, but it has been growing and came in at $59.9 million in the most recent quarter, an increase of 50%. 

Legacy is structured as a REIT, meaning it invests in a portfolio of income-producing real estate. One of the attractive features of a REIT is tax-advantaged pass-through income, meaning investors are assured of a healthy return even in a down market. 

Legacy specializes in building, selling, and financing mobile homes and tiny homes in the southeastern U.S. It’s pretty clear from that business model that the company could benefit from a high-interest-rate environment when potential buyers can’t afford a traditional home. 

Analysts have a “moderate-buy” rating on the stock with a price target of $26, which would be an upside of 50.03%, according to MarketBeat’s analyst data on the stock. 

Apartments May Shine Amid High Rates

Fellow REIT Equity Residential (NYSE: EQR), which acquires, develops, owns, and manages multi-family apartment buildings, has slumped more than 5% this week. This is yet another example of a company that seems poised to benefit from a high-interest-rate environment. 

It’s possible the stock, like American Homes and Legacy, is in oversold territory. Equity Residential has been growing revenue and earnings in the past three quarters, after several quarters in a row with declines, as you can see using MarkeBeat’s data on revenue and net income. 

Despite declines, it’s important to note that the company has remained profitable, which is a sign that the company is well managed. That’s something institutional investors look for. 

With any stock, the broad-market trend plays a role in its performance. As interest rates remain high and home purchases remain out of reach for many, non-traditional housing companies may be a good way to access that market segment.