In last week’s update, I wrote, “The economy continues to show robust recovery led by a robust housing market. New single-family house sales unexpectedly rose 6.2% to a seasonally-adjusted annual rate of 685,000 this October. We are near-term bullish on our home improvement and construction related recommendations including Home Depot (HD), Lowe’s (LOW) and Toll Brothers (TOL).”
However, this week, Toll Brothers (TOL) released fourth-quarter earnings that slightly disappointed Wall Street estimates, causing a 7% decline in the stock’s price.
In accordance to our macro viewpoint, Toll Brothers had a good quarterly and annual result. In the fourth quarter, revenue grew 9% year-over-year (YoY) to $2.03 billion. The number of home units sold also grew 9% to 2,424 units. There was robust growth in new contracts (+20%) and order backlogs (+27%). On an annual basis, revenue grew 12.5% to $5.8 billion and operating income grew 31% to $644 million.
TOL hit its fair value of 50/share before the Q4 earnings announcement and is now back to 47/share. To stay safe from any downturn in housing market, I would recommend to sell some shares and keep the rest as a near-term (one to two year) bet. SELL A PORTION.
In the last update, we recommended a Hold on Big Lots (BIG) as it approached its fair value of 59/share. The Q4 result announced this week showed no significant improvement in sales. Same-store sales was only 1% higher, with no improvement in margins. I do not see any immediate improvement in sales unless management changes its conservative policies. Big Lot is cheap compared to other off-price stores, but management seems to be hyper conservative even in this low interest rate environment. I recommend selling some shares and keeping the rest as a long-term bet. SELL A PORTION.
Another stock that has touched its fair value is Nike (NKE). The remarkable brand that co-founder and chairman emeritus Phil Knight has built over his lifetime has outperformed Adidas over the years. The stock is fully valued at the current P/E of 25 and I would not hold it for the long-term from a value perspective. SELL.
Rowe Price (TROW) has hit its fair value, but you don’t need to rush to sell at this point. Asset management has been doing great since the financial recovery. Capital appreciation in T. Rowe’s equity portfolio seems to have boosted its total assets under management, though Blackrock seems to be sucking most of the money from the market led by its passive funds, leading to stiff competition for mutual fund managers like T. Rowe in terms of attracting capital and fees. I’m slightly raising TROW’s fair value to 105.21 considering the ongoing trend in the equity market, but I recommend that you reduce your holdings as the stock nears its revised fair value. SELL A PORTION.
Closing prices on December 6, 2017.
