Toll Brothers Takes Its... Toll!

On October 27th, I wrote that TOL at $34.50 looked cheap fundamentally and that it had a great track record, so contrarians who believe that the housing market isn't overheated should look no further than TOL -- a high-quality, well-run business -- to gain exposure to the homebuilders sector. Yes, that would have been a great idea... er, for about 10 trading days. While the stock rallied, like the rest of the market, after my recommendation, today's news poured cold water on TOL's performance, and we're basically back to square one. And now, I am actually much more worried than before, even if TOL's price is the same ($34.50)...

While I did express my misgivings about the homebuilders sector in general at the time, I didn't really believe that the storm would be upon us so soon. There are two schools of thought: one is that it's just a temporary phenomenon (the slowdown in housing demand); and the other is that it's actually the beginning of the bursting of the housing bubble. I don't know which theory would turn out to be correct, but one can't argue with the fact that mortgages are becoming a lot more expensive to carry and the U.S. consumer is stretched to his limit. All in all, it doesn't bode well for the "temporary phenomenon" camp. These unpleasant announcements, once they get rolling and start popping up here and there, have a tendency to stop a lot further down the slippery slope than most people initially expect them to. TOL might indeed take its toll on the whole homebuilders sector for some time to come.