I’ve been patiently waiting to add Toll Brothers (TOL), which is my favorite name in the housing sector and I think the moment has arrived. Toll stock got hammered by as much as 10% on Tuesday morning before sharply recovering.  The stock has been in a steady decline losing some 38% so far this year.

But now, I think following the reaction to its earnings report on Tuesday, the set may be building a base and setting up a good risk/reward entry point.

You can see on the chart shares held a double at the $30 level and by bouncing back towards $33 have broken the long-term downtrend.  What was interesting to see on Tuesday was that the stock initially dropped 10%, following the earnings report. But by midday, it actually turned positive before settling fractionally lower.

That is the type of price action suggestive of a washout that occurs when a bottom is being formed.

tol brothers inc chart

Toll beat earnings estimates but lowered its forecast due to weak demand in November, reflecting a declining demand followed by further softening in November. The biggest decline being in California.

During fiscal fourth-quarter, net signed contract value of homes sold 15% from a year ago — to $1.50B. The number of contract units of 1,715 was a decline of 13%.  This being the first year-over-year declines since 2012.

Closed Tol Units by region

During the conference call, Toll CFO Martin P. Connor said, “current market conditions create a wide range of possible scenarios for our full year results. While we are targeting modest community count growth by FYE 2019, we have limited our forward-looking income statement guidance to the first quarter of 2019.”

This is sharp contrasts from just a month ago when Conner told analysts that Toll has better visibility than its peers — thanks to a longer backlog and its high price point homes. This quarter, the average sale price was $850,000, with luxury buyers who are less sensitive to an incremental increase in interest rates being targeted.

But here’s the deal…

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