Buy Alert: Toll Brothers (TOL)

By Jim Pearce • December 7, 2017

TRADE INSTRUCTIONS
Date: December 7, 2017
Name: Toll Brothers
Symbol: TOL (NYSE)
Type: Open
Limit: Buy below $48

TRADE TARGETS
Holding Period: 3 months
Target Return: 8.3%
Annualized Return: 33.2%
Target Price: $52
Stop Loss Level: $41

COMPANY DESCRIPTION
Toll Brothers, Inc. is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The Company operates through two segments: Traditional Home Building and City Living, and in five geographic regions in the United States. Link to company website.

TRADE RATIONALE
Toll Brothers took a 10% hit this week after reporting fourth-quarter results on Tuesday that were far better than last year’s numbers but came in slightly below analysts’ overly optimistic expectations. The company reported adjusted EPS of $1.17 compared $0.67 a year ago, which fell short of the $1.19 estimate.

Our Rapid Profits Matrix thinks the punishment does not fit the crime. Now priced at less than 12 times forward earnings, TOL’s yield-adjusted PEG ratio of 0.76 suggests it has become oversold. We aren’t expecting TOL to race back up the charts, but we only need it to trade up to its upper Bollinger Band within the next ninety days for us to make a nice profit in this trade.

We think that is likely to happen, given recent signs that the stock market may be rotating away from high-PE stocks into companies like TOL that have consistently grown earnings over the past five years. Combined with a Price to Sales ratio of 1.3, TOL is priced like a value stock but with the Relative Strength (83) of a growth stock.

What could go wrong over the next three months to kill this trade? An unexpected slowdown in the economy, especially weak employment numbers, could suppress home buying expectations for 2018. Also, a last-minute alteration to the tax bill that further limits mortgage interest deductibility would also hurt, but there are no signs that such a revision is under consideration.

NOTE: This stock is optionable, but trades on limited volume.

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Rick

12/07/17 ‐ 3:13pm ET December 7, 2017 at 3:13pm ET

I bought Mar 2018 $45 calls at $3.75. I may try to lower my investment later by selling calls.

Roger Dehring

12/07/17 ‐ 3:35pm ET December 7, 2017 at 3:35pm ET

Thanks for the idea, Jim,

After debating between the 47 and 48 calls, bought the MAR 48/55 calls for a -$1.82 debit. Decided to take the $0.30 or so for the 55 calls and added extra contracts.

Did a double take when I saw your recommendation. Turns out I have an earnings trade in TOL that I put on yesterday. Has a nice profit right now, but need TOL to move up another $0.75 or so to keep it. If not, will be out tomorrow at break-even or a small loss.

Thanks, roger

Janis Bell

12/08/17 ‐ 1:59am ET December 8, 2017 at 1:59am ET

Seems like most of the comments on threads in this group are about options. How can we learn more about them? Are they increasing profits? and what about risk?

Jim Pearce

12/08/17 ‐ 9:56am ET December 8, 2017 at 9:56am ET

If you are a subscriber to PF then you can access this Intro to Options document: https://www.investingdaily.com/res/downloadablePremiums/IDIntrotoOptions.pdf. If not, let me know and I’ll email it to you.

Rick

12/08/17 ‐ 2:08pm ET December 8, 2017 at 2:08pm ET

Janice, As Jim said there is background information available on the site. Many of us use more than one Investing Daily services and a couple are specifically geared to options trading. In the big picture, many of us options because you can get bigger returns quickly with options; however, you are also subject to losing all of you investment if the trade does not go your way. Stocks don’t quickly go to zero, but options can and do.

I have had very good returns following Jim advice on trade when I trade them as options but I have also lost all of my investment on some. Fortunately the former is more frequent. Using stocks instead of options is a safer path.

Janis Bell

12/08/17 ‐ 2:30pm ET December 8, 2017 at 2:30pm ET

Thanks guys! I really appreciate the responses. I’ve been doing covered calls with a broker for years, but I’m not convinced it’s really profitable (e.g. he has never beat the S&P nor come even close) and it seems best for stocks that aren’t going anywhere, but reduces profits on those that are gorwing.

Derek: Las Vegas, NV

12/08/17 ‐ 7:43pm ET December 8, 2017 at 7:43pm ET

Hi Janis,

Here is a link to the OIC, https://www.optionseducation.org/en.html.

They have lots of free material and webinars on learning options. Another good way to learn the basics is by using the material that’s available on Personal Finance as Jim noted.

If you want to receive further guidance, Options for Income is a great service, we get two credit spread recommendations every Thursday morning. If you would like to learn more or sign up please email me at dmyers@investingdaily.com or you could schedule a call with me at http://www.calendly.com/dmyers-2

I hope this helps..

Derek

Dan

01/10/18 ‐ 2:44pm ET January 10, 2018 at 2:44pm ET

Took a bit of a risk buying the Jan 19th $50 calls for .60 last month. Probably should have gone with Apr as I was looking at a loss for most of the time. Then I got to sell yesterday for 2.10 when TOL crossed the target $52. Great way to start off the year. Thanks Jim.

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