Housing Market Terrible? Not According to This Stock

Housing Market Terrible? Not According to This StockWhile there are still many pockets of weakness in the housing market, there are now some positives beginning to emerge. Market sentiment for the broad U.S. housing market will most likely stay muted, due to the millions of homes left to be foreclosed. However, the housing market is not one uniform sector, but is based on location. In certain areas, the market sentiment for the housing market has become quite positive.

One company that is benefiting tremendously from the resurgence in the housing market is Toll Brothers, Inc. (NYSE/TOL). The company recently reported quarterly earnings that were the highest since 2008.

The firm is smart in how it handles the housing market. It focuses on only the housing market segments that have high levels of demand. With a clientele that is of higher income, there isn’t concern over financing issues. Toll Brothers CEO Douglas C. Yearley Jr. stated that the company is currently seeing the most sustained demand than in any other time since 2008.

The company reported contracts signed were up 57.0% from a year-ago period and the backlog of orders now sits at $1.6 billion, up 59.0%. The company reported $61.6 million in net income, as compared to $42.1 million in the year-ago period. Revenue increased to $554 million, up 41.0% from the year-ago period.

The company CEO also noted that in many parts of the country, the housing market has a shortage of inventory, allowing for the average price at which the firm can sell homes to increase 3.4% from the second quarter.

Toll Brothers, Inc. Chart

Chart courtesy of www.StockCharts.com.

As strong as these returns were, I’d be very cautious about stepping into this stock. Market sentiment has obviously shifted to the positive for the housing market stocks, as Toll Brothers has more than doubled over the past year. Any time market sentiment becomes too positive or too pessimistic, one should take caution.

With a forward price-to-earnings ratio (P/E) of over 35, the stock is certainly not cheap. Since market sentiment has shifted so strongly in favor of the housing market stocks, I would certainly take some profits. With the fall coming soon, there are significant headwinds to worry about. The U.S. economy is still weak and Europe could implode any day. September is also one of the worst trading months and market sentiment is quite fickle; it can shift on a dime. While the housing market is obviously rebounding for the high-end, I would like to see the base spread out amongst more areas of the U.S. Such an improvement for the overall housing market would be quite bullish for the market sentiment of the entire stock market. Until then, pick your spots carefully.