Home Builders Again

[adios]

Home builders are doing well according to the income statement. The cash flow statements and balance sheets looks to me like they're pumping the earnings into building more and more houses. Low PEs on this group which indicates to me that the market is definitely anticipating the growth in earnings to slow a lot. With the economy appearing to be doing at least moderately well perhaps worth a trade here. Toll Bros came out with a great qtr and beat street estimates handily. I'm going to look over the financial statments of these companies more closely this weekend. Thinking about spreading the money around in several names. I'll update on Tuesday if anyone is interested.

[James Boston]

Are you, at all, worried that the real estate market as a whole is going start hurting soon?

[AceHigh]

You're late...you should have bought on the dip in April. I would wait now, there will be another dip and that will be a good oppurtunity for you.

Check out HOV - they report earnings Tuesday (5/31), I think. You could try buying Tuesday morning if it isn't up too much and get a quick 5% - 10%, hopefully.

[adios]

Of course I'm worried /images/graemlins/smile.gif. What kind of multiples should this group have in your opinion?

[adios]

Yeah I may be but I'm still considering, thanks for the info and advice.

[AceHigh]

Home builders is still a good section of the market, you just have to be smart about when you buy. Look for dips. Toll, Hov..etc are going to make a lot of money this year.

July/August is probably a good time frame to look to buy. I think the Fed meets the end of June, it's probably smart to wait for the Fed to buy. Plus every so often Toll takes a hit from insider trading, that is a good time to buy.

[AceHigh]

Real Estate/Home builders may slow down, it won't be hurting any time soon. Eventually home builders will stop growing, but it won't be this year or next.

People will keep buying homes and zoning laws and the government conspire to help the bigger home builders by making it difficult for the traditional small mom & pop home builders to compete. That's why companies like Toll (Tol) etc. are performing well now.

Do you really think the home builders will struggle to turn a profit any time soon?

[James Boston]

I haven't studied real estate enough to make any accurate judgements. I do think that a rise in mortgage rates may be looming. I also think there are too many proponents of no-money-down real estate, overnight millionaires, etc.. This has to be driving prices, in certain markets, way above what they should be. I, admittedly, know nothing about the company you're looking at. I'm just not excited about real estate right now.

[adios]

I would suggest that the multiples on these stocks indicate that the market is anticipating a slow down in real estate. FWIW IMO a lot of times good trades result from being generously compensated for taking the risk i.e. low multiples sometimes indicate this.

[James Boston]

I'm not going to disagree with anything you just said. However, I would prefer to see the market's reaction when the "slow down" occurs, not the reaction to the anticipation. That, IMO, is when the best opportunity presents itself.

[AceHigh]

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However, I would prefer to see the market's reaction when the "slow down" occurs, not the reaction to the anticipation. That, IMO, is when the best opportunity presents itself.

[/ QUOTE ]

This makes no sense to me. Why would he want to buy home builders after they slow down?

[James Boston]

[ QUOTE ]
This makes no sense to me. Why would he want to buy home builders after they slow down?

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Let me say this first. I have done NO research on this company, so I don't know that I would want to buy it period. My reason for wanting to wait is simple. I want to invest in companies with LONG term potential. I don't want to invest in anything that is currently riding the real estate wave. When the boom slows down (assuming it follows some kind of "S" curve growth) is when, IMO, the bad companies who have thrived from this wave will get weeded out. If I decided to invest in that sector, it will be easier to determine which companies are good.

[AceHigh]

Wouldn't a better strategy be to buy homebuilders while they are performing well, sell when they flatten out or fall and buy back if they start to perform again?

You are missing out on one of the top performing sectors for the last 5 years.

Check out this chart:
http://finance.yahoo.com/q/bc?s=TOL&t=5y

and compare to DJIA:
http://finance.yahoo.com/q/bc?t=5y&s=TOL&l=on&z=m&q=l&c=&c=%5EDJI



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I have done NO research on this company

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You should, it's one of the best companies out there.

[natedogg]

The core of TOL's business is building high end homes and a large portion of those sales are sold to older couples who are buying a second home.

If, as some reports suggest, real estate speculation is high, then TOL homes are a part of it considering they are in the business of selling lots of second homes.

They run their own mortgage financing business too so ideally, you should look into how fast and loose they are with mortgage approvals. If they are using the industry standard (ie. crazy loose), then that is a cause for concern and their sales could drop off dramatically even in the midst of a correction that is merely mild. If they are being tighter with their approvals than typical banks are being right now, then I would feel better.

Everyone knows the market will cool soon, and may even drop in some areas. Look at TOL's sales by region and see if most of their sales are in the "frothy" parts that Greenspan referred to. Greenspan is no dummy. TOL has a LOT of stuff in the pipeline, and a lot of land available for development. Make sure they are widely diversified across regions. IF most of their biz in in Phoenix, Las Vegas, SO Cal and Floridy, that should make you pause.

Just some thoughts.

natedogg

[adios]

Excellent analysis. Wouldn't all this be factored into the price though? There's a decent op ed piece by Brian Westbury in Tuesday's WSJ that discusses the reasons for the rise in home prices. As I stated in another post, I've heard read about some horror stories where people lost millions in SoCal when builders built in an area en masse. I went to Northern Nevada between Christmas and New Year. I passed thorugh Vegas on my way and it looked like there's no end to how many houses they can build in the surrounding desert.

[laserboy]

Apparently the CEO is now predicting home prices will continue to rise until Americans are spending half their income on housing and that, in the future, married couples will have to live with their parents for many years before they can afford a house.

Regardless he is dumping stock like there is no tomorrow. I believe he has sold hundreds of millions worth of stock in the last several months.

http://finance.yahoo.com/q/it?s=TOL

[AceHigh]

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Everyone knows the market will cool soon, and may even drop in some areas.

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It has too cool sometime, but I don't know when. Tol is saying they will grow 70% the remaining 2005 and 20% in 2006. That's good enough for me, for now. What other businesses do you know that are growing at these rates and have low P/E's?

People keep predicting the real-estate bubble to burst and I keep making money. Eventually they will be right (but I don't think it will ever be a "bubble", not like internet stocks), but there's a lot of $$$$ to be made in the immediate future.

[AceHigh]

And the stock is currently higher than the price of any of those sales, so you don't hear many stockholders complaining.

Actually that's often a good time to buy. A few weeks after one of the insiders sell and it causes a temporary dip in the price of the stock.

[laserboy]

Toll Brothers executives are currently pillaging more in stock options than the company earns selling houses. If I were a shareholder, I would not appreciate this type of corporate behavior.

But more to the point, I prefer ownership in companies where insiders own a large stake of the company and are aggressive buyers of the stock. It gives them a vested interest in the company and shows confidence in the long term future of the business. Insider buying is one of my favorite metrics.

While I don't consider insider selling to necessarily bearish, when the CEO is selling as aggressively as Robert Toll is, it certainly raises a red flag. If the CEO doesn't want to own stock of his own company, why would I?

This is an actual quote from Robert Toll:

"We'll reach the point Europe reached 20 years ago, where families pay 45% of their income on housing and married couples have to live with their parents for years before they can afford houses," he says. "Prices will keep going up in double digits for years."

I'm not sure if he actually believes this or not, but either way would you buy stock from this man?

[AceHigh]

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I'm not sure if he actually believes this or not, but either way would you buy stock from this man?

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Yes, and I do own a lot of Tol stock. I have owned the stock off and on for the last 5 years and it has consistently performed well for me. YMMV.

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I prefer ownership in companies where insiders own a large stake of the company and are aggressive buyers of the stock.

[/ QUOTE ]

I prefer stocks that go up 20% or more year after year.

Have you seen this chart?
http://finance.yahoo.com/q/bc?s=TOL&t=5y

Now that doesn't mean it will continue to perform, but to think Toll Brothers actions hurt shareholders value, well...lets just say I need more of my picks to hurt like this.

[natedogg]

From http://www.chartoftheday.com/20050601.htm

http://www.chartoftheday.com/20050601.gif

[KaneKungFu123]

holy [censored].

why are prices rising so fast?

[NoTalent]

Interest rates are low, and lenders are giving money to anyone with a pulse.

When a 'correction' happens, it is going to be painful for a lot of people. Anything exponential cannot be sustained.

[Delphin]

I like Ryland (http://finance.yahoo.com/q/bc?t=5y&s=TOL&l=on&z=m&q=l&c=RYL)

[AceHigh]

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When a 'correction' happens, it is going to be painful for a lot of people. Anything exponential cannot be sustained.

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Maybe not...the p/e's of these companies are all below 20, some below 10. It's not like they are super overvalued like the old internet companies, Amazon and AOL, etc. That's what most of these analysts that predict a bubble are missing, there isn't the huge expectation of future growth driving these stocks, it's the current earnings levels.

[AceHigh]

Tol's been my favorite for a while, but I like a lot of the homebuilder stocks.

[NoTalent]

I was talking about home prices in 'bubbly' areas. If someone today is buying a home that has risen 75% in value over the last two years, and they use a 1 or 3 year ARM or an interest only loan--they could be in big trouble if the house price goes down.

[AceHigh]

Oh, OK.

TOL is in a lot of National markets so slowdowns in a few shouldn't hurt them too much.