Buy This, Not That: How to Play the Homebuilder Selloff With One Smart Buy

Shah Gilani|May 21, 2025

As mortgage rates continue to climb, homebuilder stocks have taken a beating…

But as Warren Buffett says, “Be fearful when others are greedy, and greedy when others are fearful.”

With some luxury homebuilders down as much as 44% from their highs, now could be the perfect time to find value in this beaten-down sector.

I’ve analyzed the two leading luxury homebuilders – one boasting superior margins and showing signs of bottoming, while the other continues to slide.

Plus, fresh earnings data gives us a clear picture of which company is navigating the housing slowdown more effectively.

Click on the thumbnail below to get the tickers.

Transcript

Hey, everybody. Shah Gilani here with your weekly BTNT, as in Buy This, Not That.

Today I’m analyzing a couple of homebuilders – specifically the big players in the luxury home market.

Why?

Because Toll Brothers (TOL) just released their earnings, and they beat expectations handily.

They surpassed estimates by $0.66, with earnings coming in at $3.50 per share.

That’s an impressive EPS performance.

Revenue was also strong at $2.74 billion for the quarter, beating the consensus estimate of $2.5 billion by a significant margin.

Despite these positive results, the stock barely moved today.

The reason is simple: while Toll Brothers beat current expectations, analysts have been steadily lowering their earnings forecasts for all homebuilders, and Toll Brothers is no exception.

Yes, they beat the reduced estimates, but their earnings of $3.50 per share were substantially lower than the $4.55 per share they reported a year ago.

For the quarter, Toll Brothers’ profit was $352.4 million compared to $481.6 million a year ago.

So, they exceeded lowered expectations, but their performance still declined year-over-year.

The guidance from management was positive, however.

The CEO indicated that the outlook for the upscale housing market remains strong and is likely to continue, primarily due to the persistent housing shortage.

According to management, business conditions remain favorable.

But while their outlook is optimistic, Toll Brothers’ stock hasn’t performed well, though I must say it looks considerably better than Lennar’s (LEN) stock.

Toll Brothers is down almost 20% recently, leaving the stock looking rather beaten up.

Does this represent a bargain at current levels?

I believe it does, as many homebuilders now appear undervalued.

Let’s compare Toll Brothers to Lennar.

Lennar is a much larger company, roughly three times the size of Toll Brothers.

They compete in similar market segments, though Lennar doesn’t focus quite as heavily on the ultra-high-end as Toll Brothers does.

According to the CEO, the average price of a Toll Brothers house is expected to be approximately $950,000.

Lennar’s average prices are lower, though they do offer a diverse range of housing options across various price points.

Lennar’s stock has been severely punished by the market.

Their earnings report is scheduled for release on June 16th, and the consensus estimates are quite low, significantly lower than last year’s results.

As I mentioned earlier, analysts have been aggressively reducing their estimates across the sector.

For Lennar, we saw a 52-week high of around $193 on an intraday basis.

The stock has since fallen 44% from that peak – a dramatic decline by any measure.

When their earnings are released on June 16th, analysts are projecting $1.98 per share versus the $3.03 they delivered a year ago.

Both companies maintain strong balance sheets, but their stock performance tells very different stories. Let’s examine the charts more closely.

Starting with Toll Brothers, we’ve seen a significant downward move, but the stock has shown some resilience, trading just above its 50-day moving average.

I believe both companies will face challenges as mortgage rates continue to rise.

However, these rate increases will likely impact Lennar’s customer base more severely than the affluent buyers that Toll Brothers typically serves.

While Toll Brothers’ stock chart isn’t particularly attractive, it appears to be establishing a potential bottom and showing early signs of an upward trend.

I find Toll Brothers more compelling than Lennar at this juncture.

Looking at Lennar’s chart, the technical picture is decidedly worse.

Today, following Toll Brothers’ earnings announcement, Toll Brothers shares declined just 0.25%, while Lennar dropped a more substantial 1.56%.

Lennar’s chart doesn’t yet show convincing evidence of an uptrend.

Is it forming a base at these levels? Possibly, which would be encouraging for Lennar shareholders.

If forced to choose between these two homebuilders, I’m selecting Toll Brothers.

Their profit margins are superior, approximately 14% for Toll Brothers versus roughly 10% for Lennar.

Both companies maintain solid balance sheets, but I believe Toll Brothers will demonstrate greater resilience in the current environment.

Their stock appears to have established a bottom and is attempting to initiate an upward move.

So, between these two homebuilders, I recommend buying Toll Brothers and avoiding Lennar at present.

That’s it for today.

I’ll catch you all next week.

Cheers.