Wrong-Way Toll Points to 'Take Profits'

On Tuesday, homebuilder Toll Brothers (TOL - commentary - Cramer's Take) reported weaker profits, but shares headed higher when President and CEO Robert Toll said some markets may be stabilizing. I had the opposite reaction to investors. I'm more concerned about the sector's prospects after hearing his sanguine outlook, based on his track record as a contrarian indicator.

I have been bullish on the housing sector since October for two reasons:

1. Share prices for homebuilders declined 30% to 50% in less than a year, reflecting economic risks such as higher interest rates.
2. Most CEOs finally acknowledged the challenging housing environment that many had denied during the downturn.

Most stocks in the sector have been up between 20% and 25% since my call, but based on Robert Toll's upbeat comments, I am a little nervous that the sector, along with Toll, may be in line for some profit-taking.

Just take a look at his comments, all drawn from press releases or conference calls.

Back in July 2005, when Toll Brothers' share price was at its peak, Robert Toll said that the latest evidence from his salespeople was leading him to "deny that this is the beginning of the end, or that we're in for hard times." He believed in his words so much that he filed to sell 1 million shares of Toll on July 21, one day after the luxury builder hit its high of $58.67. Nice.

In December 2005, shares dropped to $34 on worries that cancellation rates on Toll properties could become a major problem. Robert Toll denied the problem, stating, "The current cancellation rate for all its properties is 6.5%, within historical ranges," and, "We're definitely not seeing specific regions with cancellation rates that are notable."

Fast forward to the beginnings of a change in tone. For the quarter ended Oct. 31, the fourth quarter of its 2006 fiscal year, Toll said its results were affected by 585 cancellations during the quarter -- a number the Toll CEO said was considerably higher than normal.

Fast forward to Nov. 7, when Toll was finally, clearly dour. After the company warned that fourth-quarter revenue and current-year deliveries would fall short of forecasts, Toll said that he saw no end to the deep slump in homebuilding. Shares were trading at $27.

---

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes TheStreet.com Stocks Under $10. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback; click here to send him an email.