Will Toll Brothers Boom in Housing's Recovery?

On Wednesday, Toll Brothers (NYSE: TOL  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, knee-jerk reaction to news that turns out to be exactly the wrong move.

The housing market has started recovering much more quickly in recent months, making investors incredibly optimistic about the prospects for Toll Brothers and its homebuilding peers. But have the industry's stocks gotten ahead of their fundamentals? Let's take an early look at what's been happening with Toll Brothers over the past quarter and what we're likely to see in its quarterly report.

Stats on Toll Brothers

Analyst EPS Estimate	$0.07
Change From Year-Ago EPS	(30%)
Revenue Estimate	$511.06 million
Change From Year-Ago Revenue	37%
Earnings Beats in Past 4 Quarters	3

Source: Yahoo! Finance.

Will Toll Brothers see an earnings rebound this quarter?
Analysts haven't shared the general enthusiasm about housing in their earnings estimates on Toll Brothers, having slashed their April-quarter estimates by nearly two-thirds and cutting $0.16 per share from their full-year fiscal 2013 consensus earnings figures. The stock also hasn't moved very far lately, falling about 1% since mid-February.

Enthusiasm among homebuilders has been extremely strong lately, as favorable data on the housing front has lifted many stocks substantially in recent months. Late last month, D.R. Horton (NYSE: DHI  ) saw sales jump nearly 50%, as profits jumped nearly 175% in its most recent quarter. Smaller builders like Hovnanian (NYSE: HOV  ) , which suffered disproportionately hard during the housing bust, have recovered the most sharply. Hovnanian's stock quadrupled in 2012, and while it's down a bit year to date, it has still held onto massive gains compared to its peers.

But Toll Brothers hasn't seen nearly the magnitude of gains that its fellow homebuilders have enjoyed. In its fiscal second-quarter results announced in February, Toll Brothers fell short of expectations despite seeing signed contracts rise by 49%. Although the company noted increased demand and building momentum in its business, average selling prices fell 2%, and investors have held back on Toll Brothers and favored other, smaller homebuilder stocks.

Interestingly, Toll Brothers has decided to move beyond outright sales to promote luxury rentals. In a partnership with AECOM's (NYSE: ACM  ) Capital investment fund, Toll Brothers announced last month it would develop a 417-unit rental tower in Jersey City, with leasing expected by early 2015. The building is the first of a planned complex that will include 925 residential units, along with a performing arts center, retail space, and a pedestrian plaza. Given Toll Brothers' focus on luxury, catering both to renters and buyers makes sense for the company.

In Toll Brothers' report, look at whether the company is able to sustain growth at rates similar to what middle-end homebuilders have managed lately. If the luxury end of the housing market is struggling, it could have ramifications not just for Toll Brothers but for the U.S. economy as a whole.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Toll Brothers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The Week Ahead: Bubble Top or Buying Opportunity?

Many analysts feel we're witnessing a bubble formation, like that which formed, and burst, in 2000, but MoneyShow’s Tom Aspray shares why he feels it's too early to make that call, given the differences between the two markets.

The long awaited Twitter IPO did better than expected, as it closed Thursday 70.8% above the initial offering price. The S&P futures had turned lower by the opening, and closed very weak. It appeared that someone was paying attention to the financial networks and their segments on whether it was a “stock market bubble.”

This discussion may have been in reaction to comments on October 29, by BlackRock’s Chief Executive Officer Laurence D. Fink, who said “Fed policy is contributing to bubble-like markets, such as the surge in stock prices.” BlackRock manages a reported $4.1 trillion in assets, which makes it the world’s largest money manager.

Two other long-term bulls, Edward Yardeni and Laszlo Birinyi, according to the New York Times, are concerned that the current complacency would lead to a “melt-up” in stock prices. They both think a correction of 10%, or so, would be healthy, as it should  set the stage for even higher prices.  Edward Yardeni has an S&P target of 2014 for next year.

In my opinion, the last real bubble in the stock market was the dot.com boom that topped in March 2000, when the Nasdaq Composite topped at 5132. It closed Thursday at 3857 and is still 33% below the 2000 high.

The chart above compares the March 10, 1999 to March 10, 2000 period with the past 12 months. It is easy to see that the angle of ascent in 1999-2000 was dramatically steeper than it is now. This is not a bubble.

Clearly, the market is overbought on a near-term basis, as 447 of the S&P 500 are higher for the year. The number of S&P 500 stocks above their 50-day MAs has dropped from just over 80 and is back to the mean of 67. It is not yet oversold, as it bottomed at 35 in October.

One common concern amongst the bears and bubble cap, is the fact that the spread between Investors Intelligence bulls and bears has jumped to 39%. The Option Strategist’s Larry McMillan points out that this is a “huge number.”

As most know, this a contrary indicator, as when too many are bullish, there is theoretically no one left to buy. Conversely, when bearish sentiment is too high, everyone has sold and no one wants to buy. The chart from Investors Business Daily shows that the last higher reading of 41.4 was reached on April 8, 2011.

In April 2011, the S&P corrected 3.3% from the highs, and then rallied 5.8% from the lows to make a new high on May 2. The S&P 500 declined 21.5% over the next ten months, as it bottomed in early October.

Using the ineffective 20% measure, stocks were in a bear market which turned the sentiment even more bearish. At the market low, the spread had reversed, as there were 10% more bears than bulls, and the daily advance/decline lines indicated a market low was in place.

On the economic front, there were several surprises last week. Most expected that the ECB would leave rates unchanged, but instead, they lowered rates by 0.25%. This was in reaction to the low rate of inflation, which is well below their target zone of 2%. The chart below of Spain’s inflation rate illustrates their problem. It was over 4% in 2008 and is now at 0.3%.

Interest rates in the Euro zone are still higher than those in the US, so it is not clear that this action will weaken the Euro enough to stimulate their economy, but that is the hope.

NEXT PAGE: What to Watch

Page 1 | Page 2 | Page 3 | Page 4 | Next Page