Despite being late in the season, earnings releases continue at a robust pace this week with more than 50 S&P 500 companies reporting. Retail is the major sector in play this week, although oil-services companies will also be prevalent. Options trading investors should take note.
We’re going on a different path, though, looking at homebuilder Toll Brothers (NYSE: TOL), which reports on Wednesday before the open. The company has an up-and-down track record with earnings and analyst estimates, with more misses than beats over the past couple of years. But the stock has generally done well following recent reports, which is probably a function of the overall sector rather than the precise numbers. For the record, analysts expect a loss of seven to eight cents for the latest quarter.
The stock and the sector have been stepping higher since late November, overcoming the generally negative news surrounding foreclosures, home prices, and home sales. In fact, TOL has been outperforming the SPDR S&P Homebuilder ETF (NYSE: XHB) for the past couple of months. The fact that these stocks have risen despite a lack of positive news is a bullish sign that reflects a conviction that a turnaround is close at hand.
Sentiment toward TOL, like the recent headlines, is generally on the skeptical side. The short-interest ratio is on the rise and just five of 17 analysts rate the stock a “buy.” Such negativity on a stock that has gained 22% in less than three months tells us that the rally has plenty of fuel in reserve.
Given this pessimistic sentiment backdrop, we like TOL’s chances for continuing its run higher. Earnings probably won’t give the stock much of a pop, but it shouldn’t get in the way either. Play the TOL March 21 Call for under $1.60 to participate in the continued rally. Don’t worry if you can’t get in ahead of earnings, as the shares usually do well in the weeks that follow the company’s reports.
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