LEG

Thinking Slow: 3 Research Blind Spots That Changed the Investment World

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Dear members: — Daniel Kahneman in his text Thinking, Fast and Slow (1) divided the human psyche into two systems. The first system is instinctive and emotional, often set on autopilot, while the second system is slower and more logical, requiring a calculating conscious. Many of the maxims the investment world takes for granted today suffer from conclusions that are made rapidly, almost without thinking, driven by our first system, creating what I call research blind spots. — In World War II, Allied bombing raids were suffering from very high casualty rates. It was estimated that for those pilots that were flying at the beginning of the war, only about 10% survived, a terrible loss rate. Bombing was crucial to the Allied … Read more

Magnificent 7 Earnings Reports Not Bad Thus Far

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By Brian Nelson, CFA   Shortly after Trump’s Liberation Day, where the President unveiled lofty tariffs on numerous countries, we released our wait-and-see outlook for the equity markets, which thus far has proven to be the right move, with the markets largely recovering from the depths reached in April. The S&P 500 (SPY), for example, is down just 3.3% year-to-date, excluding dividends.   A lot has happened since Liberation Day, including easing of tariffs to a 10% baseline for most, if not all, countries, with the key exception of China, where tariffs remain extremely elevated and prohibitive. Many countries are now reportedly negotiating trade agreements with the White House, and we expect China to be added to that list soon, even if … Read more

Trump Tariffs Higher than Expected; What We’re Doing

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By Brian Nelson, CFA The Trump tariff increases came in larger than what we were expecting, and it remains to be seen how they will flow through the global economy, as we monitor potential retaliatory tariffs from other countries. As it relates to the equity markets, we’re taking a wait and see approach at the moment as we monitor new policy changes related to trade, immigration, fiscal (tax), and regulations. In short, we’re not overreacting to the sell off as we won’t have a great handle on the tariff impact to companies for a few quarters when they report results post-tariff increases. That said, we’re expecting continued market volatility, with meaningful risk to the downside, before trade uncertainty alleviates in … Read more

KB Home’s Outlook for 2025 Better Than Expected

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Image: KB Home’s shares have done well since the beginning of 2023. By Brian Nelson, CFA KB Home (KBH) reported fourth quarter results on January 13 that beat expectations on both the top and bottom lines. Year-over-year, revenues were up 19%, to $2 billion, above consensus of $1.98 billion, while homes delivered increased 17% and average selling price advanced 3%, to $501,000. Homebuilding operating income increased 27% in the quarter thanks in part to a 60 basis-point improvement in its homebuilding operating income margin. KB Home’s housing gross profit margin increased to 20.9% from 20.7% in the same period last year. Financial services pretax income grew 8% in the quarter. Net income rose 27%, while diluted earnings per share increased … Read more

Toll Brothers Ends Strongest Year Ever

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By Brian Nelson, CFA On December 9, luxury homebuilder Toll Brothers (TOL) reported better-than-expected fourth-quarter fiscal 2024 results with revenue and non-GAAP earnings per share coming in higher than the consensus forecasts. Home sales revenues increased 10% in the quarter, while delivered homes were 3,431, up 25%. Net signed contract value was up 32% compared to the same quarter a year ago, with contracted homes of 2,658, up 30%. Backlog value, however, fell 7% on a year-over-year basis, with homes in backlog of 5,996, down 9%. Toll Brothers’ adjusted home sales growth margin, which excludes interest and inventory write-downs, came in at 27.9% in the quarter, below the adjusted home sales gross margin of 29.1% in the fiscal fourth quarter … Read more

An Important Measure of Leverage for Dividend-Growth and Income-Oriented Shareholders, One That Is Dividend-Adjusted

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As more and more investors rely on company dividends for income, dividends, in our view, have become more debt-like commitments in nature, especially from the perspective of dividend-growth or income-oriented shareholders. Years ago, we rolled out a measure of financial leverage that considers both the company’s debt and the present value of its future expected cash dividend obligations, which, in the eyes of die-hard dividend-growth or income-oriented shareholders, may be implicitly assumed to be debt-like commitments in substance. We think this leverage ratio can be used in conjunction with the Dividend Cushion ratio to gain additional insight into the dividend-paying financial health of an entity. Note: There is often great confusion with respect to published measures of financial leverage, and … Read more

Paper: Value and Momentum Within Stocks, Too

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Please select the image below to download, “Value and Momentum Within Stocks, Too:” Abstract: This paper strives to advance the field of finance in four ways: 1) it extends the theory of the “The Arithmetic of Active Management” to the investor level; 2) it addresses certain data problems of factor-based methods, namely with respect to value and book-to-market ratios, while introducing price-to-fair-value ratios in a factor-based approach; 3) it may lay the foundation for academic literature regarding the Valuentum, the value-timing, and ultra-momentum factors; and 4) it walks through the potential relative outperformance that may be harvested at the intersection of relevant, unique and compensated factors within individual stocks. To download the full report, please click here (pdf). ———- Actual results … Read more

Lennar Navigating Fluctuating Interest Rate Environment Well

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Image: Lennar has been a strong performer since the beginning of 2023. By Brian Nelson, CFA On June 17, homebuilder Lennar (LEN) reported better than expected second quarter results for fiscal 2024. Total revenues increased 9%, while diluted earnings per share leapt to $3.45 in the quarter from $3.01 in the same period a year ago. New orders jumped 19%, to 21,293 homes, while the firm’s backlog stood at 17,873 homes with a dollar value of $8.2 billion. Deliveries in the quarter increased 15%, to 19,690 homes. Its average sales price, net of incentives, per home delivered came in at $426,000 in the second quarter, while its homebuilding gross margin was up 10 basis points from last year, to 22.6%. … Read more

Toll Brothers Notes Strong Start to Spring Selling Season

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By Brian Nelson, CFA Back on February 20, luxury homebuilder Toll Brothers (TOL) released first-quarter results for fiscal 2024. Both revenue and GAAP earnings per share came in better than expected. Home sales revenue increased 10% in the quarter from the year-ago period, while delivered homes advanced 6%. Impressively, net signed contract value was up 42% from last year’s quarter, while the number of contracted homes increased 40%. Its backlog fell 18%, to $7.08 billion, however, but the company continues to benefit from higher home sales gross margins. Management’s commentary on the quarter was upbeat in the press release: We are very pleased with our strong first quarter results. We delivered 1,927 homes at an average price of approximately $1.0 … Read more

You Already Own Whatever Your Investment Will Pay You in Dividends

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“Business owners across the world know that their business is not more or less valuable because they paid themselves a higher distribution this quarter.” – Brian Nelson, CFA Image Source: Images Money Stocks are generally valued on the present value of all their future free cash flows, which already include future dividend payments. A company’s dividend policy may impact an investor’s eagerness to pay a higher price for shares on the basis of a higher yield, but the dividend is a symptom of future free cash flows (and therefore intrinsic value), not a driver behind it. where A (t) is an Enterprise Free Cash Flow (1) at year t,                 B (0) is a Total Debt at time 0,                 … Read more