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Toll Brothers (TOL) is sitting on top of a horde of cash, actively looking for opportunities to pick up land at fire sale prices, well-prepared to capitalize on the financial difficulites of smaller, weaker builders and the banks who made bad construction loans. Bob Toll is an industry veteran, with a long record of success, and understands the housing cycle as well as anyone. TOL caters to the luxury home segment and will lead the housing recovery, which may occurr sooner than most analysts expect.
My first investment experience with TOL was not a happy one. I had been doing well with options, thought TOL was over-priced, and sold some naked calls on it. Quite a few naked calls, as a matter of fact. Of course the stock promptly rallied while I watched in horror. After the daily pain got to be more than I could endure, I cut the position in half and sold some puts under the theory the stock couldn't go both directions at once. That at least proved to be true and I eventually closed the remainder of the position with a manageable loss. In due course homebuilders tanked: if I had stuck to my guns, I would have made a profit. I have not sold any naked calls since.
So I learned to respect Toll Brothers.
I added TOL to my SLOport in September last year and have added to the postion on a few days when the market, the homebuilding index, and the stock were all down. I have a 17% profit and expect to make 50% or more when the housing recovery gets going.
I did a longish blog on Homebuilders, to include TOL, KBH and RYL, on 8/15: rather than erhash it, here is a link http://www.investorplaceblogs.com/users/toma47/2008/08/homebuilders_survival_of_the_f.php.
The recent bailout of Fannie and Freddie may very well spark a rally in the homebuilders, on the gorunds that the availablility and cost of mortgages will be improved, preventing further deterioration in the housing market. That may be temporary, but based on the strong balance sheet and the ability and opportunity to refill their pipeline with new land at bargain prices, I now plan to hold TOL, currently at 24.20, for a target of 32.
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Comments (1)
The housing price probably will only reach bottom in 2011 and construction costs go up. I think even when housing price bottoms, it most likely will stay low for a few years, that means home builders margin will be low for a long period of time. I was long TOL, but sold it a while ago. It's the leader in this sector, but I still wonder if current rally for home builder stocks is a 'false rally'. I noticed CEO of tol brother sold large chunk of stocks recently. I wonder if we shall really short on rally instead of holding for 32, just follow TOL's CEO's act. What's the downside for TOL in your opinion?
Reply: You were asking what I think the downside risk is - working off tangible book value per share which I compute at 20.93, the shares could trade down as low as 16.77 (.8 x tangible book) but I would expect them to recover and will be holding out for 25 per share (1.2 x tangible book) if the position moves against me.
Tom
Posted by thunder_bird123 | September 9, 2008 1:10 AM