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Should I Avoid Toll Brothers Inc (TOL)?

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·6 min read
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In this article you are going to find out whether hedge funds think Toll Brothers Inc (NYSE:TOL) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Toll Brothers Inc (NYSE:TOL) investors should pay attention to a decrease in hedge fund interest of late. Toll Brothers Inc (NYSE:TOL) was in 30 hedge funds' portfolios at the end of March. The all time high for this statistic is 39. Our calculations also showed that TOL isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Hedge funds have more than $3.5 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.

Ricky Sandler's tsop 10 stock picks
Ricky Sandler's tsop 10 stock picks

Ricky Sandler of Eminence Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's take a look at the new hedge fund action regarding Toll Brothers Inc (NYSE:TOL).

Do Hedge Funds Think TOL Is A Good Stock To Buy Now?

At first quarter's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TOL over the last 23 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

Is TOL A Good Stock To Buy?
Is TOL A Good Stock To Buy?

Among these funds, Greenhaven Associates held the most valuable stake in Toll Brothers Inc (NYSE:TOL), which was worth $303.8 million at the end of the fourth quarter. On the second spot was Eminence Capital which amassed $114.7 million worth of shares. Southpoint Capital Advisors, Junto Capital Management, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Greenhaven Associates allocated the biggest weight to Toll Brothers Inc (NYSE:TOL), around 6.87% of its 13F portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, dishing out 1.79 percent of its 13F equity portfolio to TOL.

Seeing as Toll Brothers Inc (NYSE:TOL) has witnessed a decline in interest from hedge fund managers, we can see that there is a sect of hedge funds who sold off their positions entirely in the first quarter. Intriguingly, Ken Heebner's Capital Growth Management said goodbye to the largest position of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $11.7 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund dropped about $11.1 million worth. These transactions are important to note, as total hedge fund interest fell by 4 funds in the first quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Toll Brothers Inc (NYSE:TOL) but similarly valued. We will take a look at Prosperity Bancshares, Inc. (NYSE:PB), MasTec, Inc. (NYSE:MTZ), Mattel, Inc. (NASDAQ:MAT), Grupo Aval Acciones y Valores S.A. (NYSE:AVAL), Ascendis Pharma A/S (NASDAQ:ASND), TopBuild Corp (NYSE:BLD), and Lumentum Holdings Inc (NASDAQ:LITE). This group of stocks' market valuations match TOL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PB,21,96958,5 MTZ,36,334673,4 MAT,25,872671,0 AVAL,5,9921,1 ASND,28,2078115,-3 BLD,18,103995,-1 LITE,31,329570,-8 Average,23.4,546558,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.4 hedge funds with bullish positions and the average amount invested in these stocks was $547 million. That figure was $699 million in TOL's case. MasTec, Inc. (NYSE:MTZ) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 5 bullish hedge fund positions. Toll Brothers Inc (NYSE:TOL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TOL is 64.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd and beat the market again by 6 percentage points. Unfortunately TOL wasn't nearly as popular as these 5 stocks and hedge funds that were betting on TOL were disappointed as the stock returned 3% since the end of March (through 7/2) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.