November 21, 2017

Markets were up “bigly” on Tuesday with the S&P 500 up 0.65% and Toronto up 0.45%.

There appears to be a lot of optimism in U.S. markets based on recent earnings growth and projections for continued robust earnings growth. GAAP earnings on the S&P 500 are up 20% in past 12 months and are projected to rise another 20% in the next 12 months. Analysts tend to focus on operating earnings which eliminate certain unusual items and those are up 17% in the past 12 months and are projected to rise another 18% in the next 12 months. That is a lot of optimism given that earnings a year ago were not in any kind of trough. If the projected earnings increase in the next year occurs it would put the S&P 500 earnings well above the trend line of growth. That could occur but I would not count on it. This kind of earnings growth would put the lie to the notion that large companies face stiff competition.

Toll Brothers was up 2.0% to $47.95. This is a record high other than the needle peak of just over $50 reached in 2005. After 2005, Toll Brothers plunged with the financial crisis and bottomed out under $15 in September 2011.

For Toll Brothers to be at a record high is not necessarily anything to brag about or to worry about. This is a company that until recently retained all of its earnings for growth and as of now pays out a dividend that only amounts to 11% of earnings. Any profitable company that retains a large portion of its earnings should naturally be expected to have a rising share price over the years just as a bank account will grow if interest remains in the account to compound.

Dollarama was up another 3.3%. It’s a great company but is too expensive for my tastes.

Linamar was up 2.6%. I added 30% to my position in this stock today.