We recently compiled a list of the 10 Best Very Cheap Stocks To Buy Now According To Hedge Funds. In this article, we are going to take a look at where Toll Brothers, Inc. (NYSE:TOL) stands against the other very cheap stocks to buy according to hedge funds.
As we approach the third half of 2024, the market’s performance continues to draw in both investors and analysts alike. After rising by an average of 24% the year before, the 500 largest-cap US equities finished the second quarter of this year with an impressive gain of over 3%, on average. Overall, the unexpectedly resilient U.S. economy and the frenzied AI boom have propelled equities to unprecedented levels.
Even though the markets are currently worried about a slowdown, most recent economic indicators complement this market performance, demonstrating the US economy’s resilience. The Commerce Department revealed a 3.1% YoY gain in Q4,2023 for the economy, primarily due to solid consumer expenditure on dining out, healthcare, and automobiles. The world’s largest economy’s growth prediction was slightly revised by the IMF to 2.6% this year, pointing out the country’s robust and adaptable nature to changes in the global economy. According to Economic Intelligence’s consumer goods and retail outlook study for 2024, global retail sales are projected to rise by 6.7% in 2024, bolstered by a 2% increase in volume, regardless of a dip in inflation.
This brings us to industries that are selling at a discount, of which, broadcasting is one, at an EV to EBITDA ratio of 7.31. According to The Business Research Company, the television and radio broadcasting markets have expanded significantly in recent years. It is expected to grow from $439.41 billion in 2023 to $466.83 billion in 2024, at a CAGR of 6.2%. According to Future Market Insights, North America has the largest market share globally for television broadcasting services, followed by Asia Pacific.
The introduction of digital transmission and the Internet caused a major transformation in the television industry. Broadcast television and cable coexist with cable substitutes like HBO Max, Netflix, and Amazon Prime Video. Many others have completely cut their cable connections, opting to get all of their television needs met online. The Motion Picture Association of America reports that the film and television industries have a major economic impact, employing 2.5 million people annually and paying out over US$ 188 billion in compensation.
Another industry trading at a reduced price is air transportation, which has an EV to EBITDA ratio of 6.17. The Business Research Company reports that the size of the air transport market has expanded dramatically in recent years. The projected CAGR is 6.8%, which would see it rise from $1,016.38 billion in 2023 to $1,085.37 billion in 2024. Furthermore, it is anticipated that during the next several years, the size of the air transport sector will rise significantly. With a 6.5% CAGR, it will reach $1,394.51 billion in 2028.
The future expansion of the air transport market is anticipated to be driven by the growth of e-commerce and online shopping. For example, in September 2022, the US Department of Commerce’s International Trade Administration reported that consumer e-commerce accounted for 30% of the UK’s total retail market (up from 20% in 2020), with over $120 billion in e-commerce sales annually. In the UK, 82% of individuals will have made at least one online transaction by 2021.
Methodology:
We selected stocks with an institutional ownership of over 70% and a PE ratio under 10, as of June 25 for our list of 10 Best Very Cheap Stocks To Buy Now According To Hedge Funds. We narrowed down our selection to 10 stocks that were the most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q1 of 2024. In cases where two or more stocks have the same number of hedge funds, we’ve used the PE ratio as a tie-breaker.
In order to identify cheap stocks, we searched for companies with a strong earnings track record by evaluating their EPS over the last two to three years. Secondly, we only considered stocks that received “buy” or “strong buy” recommendations from analysts.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here.)
A team of architects meeting around a blueprint to discuss the design of a high-end apartment rental.
Toll Brothers, Inc. (NYSE:TOL)
Number of Hedge Fund Holders: 54
PE Ratio as of August 1: 9.47
Having been established in 1967, Toll Brothers, Inc. (NYSE:TOL) is currently ranked as the fifth largest homebuilder in the United States by net sales, and it operates in 60 markets across 24 states. The firm offers a variety of product lines, including luxury move-up homes and luxury homes targeted at millennials, with an average price of about $1.028 million.
Toll Brothers, Inc. (NYSE:TOL) is considered a cheap company with a PE ratio of 9.47 as compared to the weighted average residential construction industry PE ratio of 11.19. In Q1 2024, hedge fund sentiment for the stock was positive, with 54 hedge funds investing in it, up from 49 in the previous quarter. The largest stakeholder in the business, holding 5,565,787 shares valued at $641.07 million, is Edgar Wachenheim’s Greenhaven Associates.
In light of its growth potential, TOL presents a more favorable value proposition with a PEG ratio of 1.01 as opposed to the industry average of 1.06, indicating that TOL may be slightly undervalued.
The fact that TOL offers its products built-to-order is the reason for the company’s success. Until purchasers have a contract with TOL, the company does not start construction. This business approach provides great assurance in future expenses, margins, and control over the monetary benefit of each property.
Toll Brothers (NYSE:TOL) saw an upgrade from a Sell to a Neutral rating by Goldman Sachs in June, with an increased price target of $124 from $112. This adjustment emphasizes the higher return on equity (ROE) of the luxury homebuilder, which is predicted to be 20.3% for the fiscal year 2024, above the average ROE of 18.5% for builders that Goldman Sachs tracks. According to Goldman Sachs, new house sales will continue to exceed forecasts, bolstering Toll Brothers’ consistent income, profitability, and returns beyond historical averages.
Toll Brothers’ stock has been resilient in the face of rising mortgage rates, demonstrating the company’s solid market position and strategic ambitions. Over the last ten years, Toll Brothers has seen a significant increase in free cash flow. Over the last five years, the S&P 500 returned 86%, while the stock increased by more than 216%, outperforming the market by 130%. TOL’s EPS has also increased over the previous three years.
The reason for the improvement is that Toll Brothers performed better than anticipated. The firm has successfully capitalized on the robust and persistent demand for houses, which surpasses the available supply. The company’s activities and the capacity to offer higher-quality, discretionary properties are credited with this accomplishment. Toll Brothers has been able to sustain a strong sales trajectory despite the market’s expectation that purchases would be delayed because of high mortgage rates.
In Q2 2024, the business generated $2.84 billion, beating analyst projections of $2.58 billion and a 13.2% increase over the same period the previous year. Toll Brothers increased its full-year projection to $10.23 billion after reporting record Q2 fiscal 2024 home sales revenue of $2.65 billion, 6% more than the same quarter the previous year. This was attributed to favorable demographics, a robust economy, and growing demand for new houses. Citi maintained a Neutral rating and lowered its price target to $133 despite these encouraging results because of worries about an anticipated decline in gross margins for the second half of the year.
Keefe, Bruyette & Woods increased their price target from $135 to $142, maintaining their Outperform rating, pointing out a noteworthy 30% year-over-year increase in orders, and projecting a 25% increase in book value by the end of 2025. Wolfe Research kept its Outperform rating but raised its price objective to $135 from $123. Wells Fargo Securities gives a positive perspective with a price objective of $150, while Barclays Capital Inc. has an “Underweight” rating with a $118 price goal. RBC Capital Markets has a price target of $130 and an “Outperform” rating. In total, 16 analysts have rated this stock as a “buy,” with an average price target of $132.19.
Despite encouraging financial patterns, there are also concerns, such as rising interest rates, labor disputes, shifting building material prices, and the potential for real estate market downturns. Profitability may be impacted by these variables.
Baron Real Estate Fund stated the following regarding Toll Brothers, Inc. (NYSE:TOL) in its first quarter 2024 investor letter:
Following exceptional performance in 2023, the share prices of our investments in homebuilder companies – Toll Brothers, Inc. (NYSE:TOL), Lennar Corporation, and D.R. Horton, Inc. – continued to move higher in the first quarter of 2024, gaining 26.1%, 15.8%, and 8.5%, respectively, in part due to the continuation of strong quarterly business results and management optimism about each company’s multi-year prospects. Our recent meetings with CEOs Doug Yearley (Toll Brothers), Stuart Miller (Lennar), and Paul Romanowski (D.R. Horton), reinforced our view that each company is well positioned to generate strong long-term shareholder returns.
In March, we traveled to Pennsylvania to meet with Doug Yearley and other key members of Toll Brothers’ senior management team. Our broad-ranging discussion strengthened our view that the long-term prospects for Toll Brothers have never been brighter. Our optimism is due to several factors including:
Strong long-term growth prospects: In the next few years, we believe Toll Brothers has the ability to grow its community count of homes by approximately 10% per annum due to its multi-year supply of highly desirable land and the possibility of additional land or builder acquisitions…” (Click here to read the full text)
Significant upside potential is suggested by Toll Brothers, Inc. (NYSE:TOL)s’ strategic goals, good market performance, a better ROE, and healthy sales. The firm has a good chance of growing in the future because of its capacity to handle market obstacles.
Overall TOL ranks 5th on our list of the very cheap stocks to buy. You can visit 10 Best Very Cheap Stocks To Buy Now According To Hedge Funds to see the other very best cheap stocks to buy that are on hedge funds’ radar. While we acknowledge the potential of TOL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TOL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.