What Happened?
Shares of homebuilding company Toll Brothers (NYSE:TOL) fell 7.8% in the afternoon session after the company reported weak fourth-quarter results. Its revenue missed significantly, and its EPS fell short of Wall Street's estimates as margins shrunk. Also, its backlog value fell by 2% relative to the previous year, suggesting some moderation in future sales, and the company called out that "affordability constraints and growing inventories in certain markets are pressuring sales." Overall, this was a softer quarter.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Toll Brothers? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Toll Brothers’s shares are somewhat volatile and have had 13 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 7 months ago when the stock gained 6.5% as investors seemed to be rotating out of large-cap tech winners like NVDA, GOOGL, and MSFT and into smaller cap stocks, with housing stocks as a bright spot in particular. The rotation was likely sparked by the inflation report by the Bureau of Labor Statistics. It revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of June 2024 came in better than expected at 3% year on year (the lowest level in more than three years). The inflation prints supported the argument that the Fed will start cutting rates this year as the headline figures moved closer to the 2% target. Lower rates greatly impact the housing market, which has been tepid in the last year-plus.
Specifically, lower rates make homebuying more affordable for consumers because on the same value home, monthly payments are less with a lower mortgage rate. Before rates began to rise 2022, many potential homebuyers anchored on a home value they could afford--let's say $450,000. As rates rose, the home they could afford with the same monthly payment fell--let's say towards $300,000. However, they weren't very excited about buying a lesser home after having their eyes on higher-value homes. Many chose not to transact.
On the other side of the coin, many homeowners with mortgage rates in the 2-3% range chose not to sell because of the prospect of having top buy a new home with a 6-8% mortgage rate attached to it. Demand suffered. Supply suffered. The inflation report could be an early sign that the housing market could thaw and even become hot if the Fed cuts rates.
Toll Brothers is down 9.4% since the beginning of the year, and at $112.90 per share, it is trading 32.7% below its 52-week high of $167.80 from November 2024. Investors who bought $1,000 worth of Toll Brothers’s shares 5 years ago would now be looking at an investment worth $2,384.
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