Sunday, January 15, 2017

Buy On Weakness - Backlog Can Offset Near-Term Challenges

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Investors typically look at top line and backlog, which we'd expect to continue strong.

There are some issues that can act as headwinds to near-term earnings.

That said, we expect investors to look through near-term risks because there appears more to come for this housing cycle.

Toll Brothers is in the midst of struggling through some issues in the key markets of New York and California, which could drag earnings in the near term. Even with that, Toll Brothers is putting up very strong top-line and backlog numbers. If we get some stock weakness, we want to use it to buy because we think there is a lot of visibility ahead.

Here's New Home Sales ("NHS") versus Toll Brothers stock indexed to NHS.

Above you see that Toll Brothers far outperformed new home sales until recently.
After the California incident a year ago, the stock came back from outperforming the NHS index.
As long as interest rates don't spike, the NHS index should continue its upward trajectory. We'd expect Toll Brothers to put the California issues behind it and get back to outperforming the overall industry.
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