November 20, 2016 Toll Brothers

Toll Brothers stock price has declined in the past three month and remains well below where it was in 2014 and 2015. And, it did not benefit very much from the Trump bump.

I suspect that there are fears that higher interest rates will lead to a slowdown in new home construction. But interest rates are expected to remain quite low even after the increases. And housing affordability in the U.S. is strong. There could very well be a surge of buyers hoping to beat the interest rate increases.

This weakness in Toll Brothers’ stock price (and that of home builders in general) was not much affected by positive data reported on Friday morning. The summarized the new data as follows:

Housing starts surged by 25.5% in October to an annual rate of 1.32 million units. Single-family housing starts rose by 10.7% to a seasonally adjusted rate of 869,000 units. Data on homebuilding was firm in November and October. The National Association of Home Builders reported that the Housing Market Index stayed at 63 in November.

So, housing starts are “surging” while Toll Brothers stock languishes at a low P/E level and low premium to book value. And Toll Brothers adjusted earnings have been increasing and there appears to me to be a 15 to 25% increase baked-in for the next year based on home building contracts already signed. While there are never any guarantees this looks like a clear investment opportunity to me. It may be a bargain hiding in plain sight.