Toll Brothers: Winner in Luxury

10/01/2013 8:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mortgage rates have declined since the Fed announcement to continue its highly inflationary "easy money" policy, and that's good news for homebuilders, suggests Mark Skousen in his Hedge Fund Trader Alert.

Our latest featured recommendation is Horsham, PA-based Toll Brothers (TOL), the largest US luxury home builder.

This homebuilder is a winner. It has been in top form since the 2008 financial crisis, and is now building luxury homes in 19 states, primarily the fast-growing states in the West, in the South, and in the Northeast.

The company is known for its quality work, having won the prestigious “Builder of the Year” Award twice by Professional Builder magazine (including last year).

I like Toll Brothers' financial metrics. Sporting a 21.5% profit margin, it earned more than $487 million in profits in the past year, while generating a 24% increase in revenues to $2.3 billion.

The company has more than $1 billion in cash to expand with, or pay off its debts (it does not pay a dividend—yet). Return on equity (ROE) is an outstanding 16.5%.

And the builder's valuation is still relatively cheap, selling for only 12 times earnings. Toll Brothers has a price/earnings to growth (PEG) ratio of 0.76 (anything less than 1 is considered excellent).

The slow economy is likely to keep mortgage rates down for now, and that's good news for homebuilders.

Let's buy Toll Brothers TOL at market today and set a protective stop of $27 a share here. For those willing to play it more aggressively, consider buying the January $38 calls.

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