I’m still finding attractive opportunities; the key is to make sure you’re buying solid growth at a reasonable valuation, suggests Mark Skousen, editor of the specialized advisory service, Home Run Trader.

Take Toll Brothers (TOL), for example. Founded in 1967 and based in Fort Washington, Pennsylvania, Toll Brothers is a Fortune 100 company and the nation’s premier builder of luxury homes. The company’s average selling price of $968,000 is more than twice that of publicly traded peers like D.R. Horton (DHI) and PulteGroup (PHM).

The company was named the World’s Most Admired Homebuilder — for the seventh time — in Fortune magazine’s 2022 survey of the world’s most admired companies. 

Toll Brothers operates in 24 states and offers potential buyers several major advantages, starting with the very best locations. It specializes in upscale neighborhoods with scenic views, natural amenities and excellent proximity to schools, commuter routes and entertainment.

The builder also offers superior architectural design, low-cost financing and top-brand products, including Bosch appliances, Carrier heating and air systems, Mohawk flooring and Yorktowne cabinetry, to name just a few.

Of course, the rise in mortgage rates to 7% from 3% has slowed down the residential real estate market. Yet the demand for new housing remains strong. Plus, affordability remains good in the luxury sector, where buyers are more affluent.

Upscale homebuyers are less susceptible to the economic cycle than middle-class buyers. That’s because many high-paid professionals — like doctors and lawyers — don’t see their incomes decline during recessions.

Approximately 20% of Toll Brothers’ customers pay cash. In 2022, a year filled with supply chain disruptions, labor shortages, permitting delays, increased mortgage rates and other operational challenges, Toll delivered more than 10,500 homes and earned $1.7 billion before taxes.

In the most recent quarter, earnings jumped 71% on a 22% increase in revenue. The company enjoys a 15% operating margin. And management is earning a healthy 23% return on equity.

Toll Brothers has exceeded earnings estimates in each of the last four quarters, with an average surprise of 15%. Plus, 2023 should be another solid year. The builder ended 2022 with a backlog of 8,100 homes valued at $8.9 billion.

I estimate that earnings will rise from $8.39 a share in 2022 to nearly $9.50 this year. Despite these exceptional numbers, Toll Brothers is undervalued at just five times earnings and only 86% of book value. This is a growth stock masquerading as a value play. So, pick up the stock at market and enter a sell stop at $45 for protection. 

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