The Commerce Department will release data on housing starts for the month of August on September 18. The real estate market has been showing signs of improvement, but Toll Brothers (TOL), which designs, builds, markets and arranges financing for single-family detached and attached homes in luxury residential communities, has not managed to make real gains this year and has just now begun to make some movement upwards after a pullback.
The housing market bubble and accompanying collapse was one of the biggest factors contributing to the recent recession endured. Now, the housing industry is slowly clawing its way back to health, as seen in the chart below:
Housing starts represent new home construction. While the housing market is still well below the levels reached 15 years ago, housing starts in July 2013 were 87% above April 2009’s low. That represents an annual growth rate of over 15.5%, even including the minor dip seen in the second quarter of this year.
With home construction up — and projected to keep rising, according to the National Association of Home Builders — Toll Brothers, whose prices generally follow the same trend of housing starts, needs to be considered for a rebound.
Many homebuilders such as Toll Brothers, PulteGroup (PHM) , and Hovnanian (HOV) are poised to capitalize on rebounding housing markets in the United States, which has finally begun to show signs of real life after trailing behind the market recovery. The housing market’s recovery has been driven by low interest rates and once-again attractive home prices, which compare favorably to increasing rental rates. Toll Brothers owns a large amount of land in urban areas, which will enable it to market its upscale offerings to a more well-heeled population. In an increasingly two-speed economy, that’s an advantage worth hanging onto.
Toll Brothers should enjoy continued growth thanks to a solid backlog of about $2.4 billion in customer orders, with an average cancellation rate of less than 5% in recent quarters. Toll Brothers has priced its luxury homes at an average of $577,000 so far this year. The persistent low interest rates will be important to Toll Brothers’ continued progress.
Hedge funds have increased their exposure in TOL, and at Q2’s end, hedge funds that were long in TOL increased their stakes by 4% from the first quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully.
Consequently, certain bigger names have jumped into Toll Brothers headfirst. Point State Capital initiated the largest position in TOL, with 57.1 million invested in the company. Merchants’ Gate Capital also initiated a $33.7 million position during the quarter.
Analysts also favor TOL as can be seen with the number of recent research reports. Analysts at Zacks reiterated a “neutral” rating on shares of Toll Brothers and now have a $32.00 price target on the stock. Raymond James has a price target of $38.00 with a “strong-buy” rating on the stock. Finally, analysts at RBC Capital raised their price target from $29.00 to $30.00 with a “sector perform” rating on the stock.
While stock prices for homebuilders have fallen in recent months due to rising mortgage rates, the sector should provide buying opportunities, particularly for Toll Brothers, and especially if the housing data shows that recovery is definitely underway. Toll Brothers should also benefit from stronger housing demand despite rising mortgage rates.
Therefore, take advantage of the following options call:
OPTIONS TRADE: Buy the TOL Jan 2014 35.000 call (TOL140118C00035000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $3.00.
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