Sometimes unloved stocks are good stocks that have just rubbed investors the wrong way and actually represent great investment opportunities. Quite often, though, unloved stocks are unloved because there is something very wrong with either the stock or the company behind it.
In the Motley Fool's CAPS community, stocks are rated on a scale of one to five stars based on the ratio of outperform and underperform ratings given to them by CAPS members. Stocks with the worst ratios end up with one-star ratings -- the CAPS equivalent of a flashing red warning beacon.
One of the stocks that has landed that dreaded one-star rating is Toll Brothers (NYSE: TOL ) , a nationwide builder of single-family homes, practically a death sentence in itself. Making matters worse, the company focuses on the luxury end of the housing market, an area that has been particularly clobbered.
To get a better idea of why Toll Brothers is so unloved, let's take a look at how it stacks up against other companies in the homebuilding industry.
|
Company
|
TTM Net Income Margin
|
TTM Revenue Growth
|
Price-to-Tangible Book Value
|
CAPS Rating
(out of 5)
|
|
Toll Brothers
|
(12.2%)
|
(43.0%)
|
0.8
|
*
|
|
D.R. Horton (NYSE: DHI )
|
(27.7%)
|
(46.1%)
|
1.0
|
*
|
|
KB Home (NYSE: KBH )
|
(25.7%)
|
(54.6%)
|
1.4
|
*
|
|
Lennar (NYSE: LEN )
|
(30.5%)
|
(42.3%)
|
0.6
|
*
|
|
Pulte Homes (NYSE: PHM )
|
(23.9%)
|
(38.8%)
|
0.9
|
*
|
Sources: CAPS and Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.
I probably don't need to belabor the point, but as the table above makes perfectly clear, the housing industry is still an utter wreck. The economic downturn was led by the housing market, and it looks as if housing could be one of the most stubborn areas when it comes to turning back around.
We could say that Toll is one of the more attractive stocks of this horribly unattractive group based on the fact that its valuation is among the lowest. However, these companies can be particularly hard to value because, in most cases, housing inventory makes up the bulk of their assets. Toll, for instance, had $3.7 billion worth at the end of the first quarter.
To get a little more color on why CAPS members are so pessimistic on Toll, let's take a look at what Toll bear assistryan had to say back in March:
The housing industry still has a long way to fall. Tolls' wheel house is mid to upper end mcmansions. Tighter credit is hitting this price range the worst. As the market stabilizes the lower end will recover first, follow at least 2-3 years later by the upper end market. In addition the majority of the markets around the country are way over built. It is still going to take years to clean up inventory levels.
Now I'm going to toss the ball in your court. Is Toll a stock worthy of a rock-bottom rating? Or has the CAPS community overlooked the company's potential? Head over to CAPS and let the 135,000 community members know how you feel.
And if it feels good to jab your thumb down on a stock, you may want to check out KB Home and Lennar, both of which have been (not surprisingly) out of favor among Toll Brothers bears.
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