Monday was a down day in the markets with the S&P 500 down 1.6% and Toronto down 2.0%.
Accordingly, almost all the stocks on our list were down.
A couple of stocks of note:
Toll Brothers is down to $26.95. That makes it more attractive than at any time since I first added it to this site on June 5, 2011 at $21.03. At that time earnings were next to nothing (I had it at 16 cents per share) as it was just crawling out of the housing bust. Its book value per share was $15.27. Subsequently the stock got (briefly) as low as about $14 and as high as just over $40. The price went above $30 in the summer of 2012 and bounced around the low 30’s to about $40 before very recently falling under $30 again. At this time the trailing earnings are $2.04 and the book value is $22.86 per share. So, the trailing P/E ratio is 13.7 and the price to book ratio is 1.18. The analyst P/E ratio based on October 2017 fiscal earnings is shown as 9 implying they expect about a 50% increase in earnings in less than two years.
From 2011 until quite recently, the P/E ratio on this stock was high and the investment thesis was that earnings would ramp up rapidly with the housing recovery. And earnings are a lot higher now although they have also been lumpy with a large spike in 2012.
Toll Brothers is a bit odd in that when it contracts to build a house (sells a house) it does not book the revenue for another 12 months. The result is that the earnings are somewhat predictable for a year ahead and my understand as indicated in the report is that an earnings increase of 20 or 25% is pretty much baked into the numbers for 2016 (that would exclude any special charges).
So, at this point the stock looks like better value than I have ever seen it based on achieved earnings versus price. Maybe its contracted new sales in 2016 (which will be revenue in 2017) will fall. That is a risk if the U.S. goes into recession. But a lot of forecaster don’t expect that. To me, Toll Brothers looks like quite good value at this price.
Berkshire Hathaway is down to $124.13. Buffett has pledged to buy back shares if the price falls to less than 120% of book value which would be about $120.86. So, I think this puts something of a floor under that stock and it would be entertaining to see it fall to $120 so Berkshire could buy back some shares. Sometimes companies can’t buy back shares when an earnings release is pending so it is possible that Buffett would have to wait until Berkshire releases earnings at the end of February.
It will also be interesting to see what buying Buffett has been doing lately as the market fell. Berkshire will close its largest ever acquisition (Precision Castparts) this Friday at $37 billion (though that included some assumed debt. But with a purchase of $30 billion or whatever, Buffett may not have felt he had enough cash around to buy aggressively on this downturn, as he likes Berkshire to retain maybe $40 billion ($20 billion absolute minimum) as a sort of emergency fund. Cash at Q3 was about $65 billion. Cash, by the way basically means T-bills because you can’t safely keep that much cash in a bank much less in the office safe. If T-bills ever went slightly negative on yield, Buffett might still hold them because there no bank account that is a safe as owning T-bills.