2 Homebuilding Stocks to Avoid as Interest Rates Rise

NYSE: TOL | Toll Brothers, Inc.  News, Ratings, and Charts

TOL – Rising mortgage rates have slowed refinancing and new loan originations, putting the brakes on the housing industry’s growth. Furthermore, persistent supply chain constraints and tightening labor markets continue to impair the industry’s prospects. Given this backdrop, we believe homebuilding stocks Toll Brothers (TOL) and KB Home (KBH) are best avoided now. Read on.

The 30-year fixed-rate mortgage’s average contract interest rate has climbed to 3.72% from 3.64%, prompting fears among homebuyers that they will no longer be able to afford the properties they want. According to the Mortgage Bankers Association’s seasonally adjusted index, mortgage refinancing applications, which are particularly sensitive to daily rate swings, have declined 13% for the week and are 53% lower year over year.

In addition, considering the Fed’s decision to hike interest rates in March to tame inflation, persistent supply chain crisis, and a tightening labor market, the home building industry’s growth prospects could be negatively affected.

Therefore, we think investors are better off avoiding homebuilding stocks Toll Brothers Inc. (TOL - Get Rating) and KB Home (KBH - Get Rating). These stocks have suffered significant price declines over the past few months and could continue to retreat further based on their bleak growth outlook.

Toll Brothers Inc. (TOL - Get Rating)

TOL and its subsidiaries design, build, market, sell, and arrange to finance a variety of detached and attached houses in luxury residential communities around the United States. Traditional Home Building and City Living are the company’s two operational segments. In addition, it has a strategic partnership with Equity Residential to develop new rental apartment communities in the U.S. markets. TOL is headquartered in Horsham, Pa.

TOL’s selling, general, and administrative expenses increased 4.8% year-over-year to $258.19 million in the fourth quarter, ended Oct. 31, 2021. Its 22.4% trailing-12-months gross profit margin is 37.6% lower than the 35.9% industry average. Also, its CAPEX/Sales multiple and asset turnover ratio are 69.6% and 25.7% lower than their respective 2.5% and 1.1% industry averages.

The stock has declined 7.1% in price over the past three months and 20.3% over the past month.

KB Home (KBH - Get Rating)

KB Home is a Los Angeles-based home building company. It primarily caters to first-time, first-move-up, second-move-up, and active adult homebuyers by building and selling connected and detached single-family residential houses, townhomes, and condos. The company operates in four segments: West Coast, Southwest, Central, and Southeast. In addition, it provides financial services, such as insurance and title services.

For the fourth quarter, ended Nov. 31, 2021, KBH’s cost and expenses increased 35.4% year-over-year to $1.45 billion. Its interest income declined 97.2% from its year-ago value to $11,000. The company’s cash and cash equivalents decreased 57.3% from the prior year to $290.76 million.

KBH’s 22.5% trailing-12-months gross profit margin is 37.4% lower than the 35.9% industry average. Also, its CAPEX/Sales multiple and asset turnover ratio are 75% and 2.3% lower than their 2.5% and 1.1% respective industry averages. Furthermore, its trailing-12-month cash from operations stood at a negative $198.76 million compared to the $183.70 million industry average.

The stock has declined 17.4% in price over the past nine months and 7.4% over the past month.

Want More Great Investing Ideas?

3 Stocks to DOUBLE This Year


TOL shares were trading at $55.62 per share on Thursday morning, down $0.55 (-0.98%). Year-to-date, TOL has declined -22.98%, versus a -7.22% rise in the benchmark S&P 500 index during the same period.


About the Author: Pragya Pandey


Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
TOLGet RatingGet RatingGet Rating
KBHGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


Stock Market Update: It’s Complicated!

The S&P 500 (SPY) may have bounced 17% from recent lows, but the outlook for stocks from here is...in a word...COMPLICATED. Read on to get Steve Reitmeister full market outlook and trading plan for this complicated market environment.

Becoming More Bullish on Stocks, But...

Stocks are on a roll with the S&P 500 (SPY) up more than 10% from the recent lows. Before you start getting too giddy, you should read this updated market outlook and trading plan Steve Reitmeister.

Stock Market Held Hostage

Uncertainty is the term most often applied to this stock market. Uncertainty over tariffs. Uncertainty of whether the S&P 500 (SPY) will fall into bear territory. Uncertainty over what happens next. Steve Reitmeister dives into the uncertainty to make sense of the market in this week’s commentary...

Stock Market Standing on the 50 Yard Line

Steve Reitmeister contemplates where the stock market stands now and what happens next in trying to stay on the right side of the market action. One path points to bear and one to new highs for the S&P 500 (SPY). Which will it be?

Bear or Bull Market?

The S&P 500 is on the brink of bear market territory...but that outcome is not a given at this time. Steve Reitmeister shares insights gleaned from his 45 years of investing to shine a light on current conditions along with his top picks...

Read More Stories

More Toll Brothers, Inc. (TOL) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All TOL News