April 22, 2019

On Monday, markets mostly took a break from the recent upward trend. The S&P 500 did manage to gain 0.1%. The DOW was down 0.2% and Toronto was also down 0.2%.

Toll Brothers was down 2.6% after a weak report regarding U.S. single family housing starts in March. Despite lower mortgage rates home building has not picked up. Toll Brothers has done well to have risen in 19% 2019 (before today’s drop) despite continued weakness in U.S. housing starts and permits. Some of the reasons cited for the industry weakness include a lack of available building lots and labour shortages. Normally, I would expect market forces to take care of the labour shortage but it may be that tougher immigration policies are having an impact. Anecdotally, I have heard that Mexican workers were extensively used in home building. If the issue is a building lot shortage this should be a strength for Toll Brothers. They have a big inventory of lots available.

Toll Brothers also announced today that it is now the 14th largest developer of multi-family houses in the U.S. and the fastest growing. It broke ground on 2,800 apartment homes in 2018. It intends to rent out most or all of these. In total it owns or controls land for a potential 18,000 apartment units. Since this ties up capital and since this REIT type income might not be fully valued inside of a home builder / land developer, I would not be surprised to see Toll Brothers sell some of these apartments to joint venture partners or even spin off a partially owned REIT at some point.

Overall though it is not clear how well Toll Brothers stock will do this year in the face of industry headwinds. The stock could remain cheap and of course can always get cheaper, at lest temporarily. But last year they made an ROE of 16% and if they can stay close to that the stock will eventually respond.

Shopify traded over $300 today. It seems that nothing has been able to stop the momentum – not short sellers, not high multiples to sales. Not so far at least.

Tomorrow I will add the construction company Aecon Group Inc. to the list. It is in a tough business. I find it hard to fathom that it only made a net profit of 1.8% of revenue last year. And that was despite a sharp increase in profits versus 2017. It’s ROE has historically been sub-par at least over the past ten years. It does however have a 3.4% dividend yield and has increased the dividend steadily. I think it does great work and benefits the country and its government and private sector customers though its work. It was interesting to learn some of the projects it is involved in. But I find the profit level to be disappointing especially given the risks it takes on. It is set to probably sharply increase profits again this year (forecast around 25%). For that reason, it might be worth a look as a speculative pick but overall it does not seem like a high quality company to own for the long term in terms of profits. It will release Q1 earnings later this week and so buying in the next day or so would be more speculative s opposed to waiting for the earnings report.

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