Booking Profits In Facebook And Putting Them To Work In Toll Brothers

Aug.31.14 | About: Facebook (FB)

Summary

With interest rates remaining low, I believe the affordability of a new home is becoming much better, hence I'm picking Toll Brothers as one of my housing stocks.

Facebook is expensive on earnings growth expectations.

Toll Brothers is inexpensive on earnings growth expectations.

I recently closed my position in Facebook, Inc. (NASDAQ:FB) from my growth portfolio because I felt that I had a pretty good profit at the time. I ended up buying shares of Toll Brothers Inc. (NYSE:TOL) because I felt that the housing sector is still on the rise as interest rates are getting lower. Toll designs, builds, markets and arranges financing for single-family detached and attached homes in luxury residential communities. On May 28, 2014, the company reported second quarter earnings of $0.35 per share, which beat analysts' estimates by $0.09. In the past year, the company's stock is up 14.11% and is losing to the S&P 500 (NYSEARCA:SPY), which has gained 20.42% in the same time frame. I initiated my position in Toll on August 19, 2014 and am up 1.45% on my position.

I sold my shares in Facebook because I wanted to lock in some profits in the portfolio and move into a name that has been lagging. Facebook is a social networking website which builds products that creates utility for users, developers and advertisers. On July 23, 2014, the company reported second quarter earnings of $0.42 per share, which beat the analysts' estimates by $0.10. In the past year the stock is up 84.51% and is beating the S&P 500, which has gained 20.42% in the same time frame. Let's now take a look at both stocks on a fundamental and financial basis.

Fundamentals

Some investors like to look at the trailing twelve month P/E ratio because it tells them how the stock is valued with respect to earnings which were actually earned. I mainly like to look at the forward year P/E ratio to get an idea if earnings for the coming year are about to increase or decrease. I don't like paying more for a company's future earnings than what I was paying for the previous year because it indicates that the earnings for the coming year are going to be less than the previous year. A reduced future year earnings indicates either a reduction in revenues or major expenses are being incurred. The main purpose of looking at a forward P/E ratio is because when we buy stocks, we are buying a piece of the company's future earnings.

I also like to look at the 1-year PEG ratio. This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone.

An additional value I like to look at is the earnings per share growth for the coming year. This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above.

Let's take a look at how Facebook and Toll stack up against each other on a fundamental basis in the table below.

Stock

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

FB

74.82

81.33

37.04

2.02

30

3.26

24.92

TOL

35.59

25.60

15.60

2.28

34

0.84

30.42

Click to enlarge

Because both stocks are considered growth stocks due to their extremely high earnings growth expectations one would anticipate their earnings valuations to be expensive. As we can see from the table above, Toll is fairly valued (I consider a P/E value between 15 and 30 to be fair) and Facebook is expensive on trailing earnings (I consider a P/E value above 30 to be expensive). Additionally, on future earnings Toll remains fairly valued while Facebook remains expensive. But because both stocks have different growth profiles it's important to measure the PEG ratio. By looking at the PEG ratio I believe that Facebook is expensive (I believe a PEG value above 2 is expensive) while Toll is cheap (a PEG value below 1 is inexpensive for me). Hence on a fundamental basis I believe Toll to be the better stock because I value the PEG ratio the most for growth stocks.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. In my growth portfolio however I will forego the dividend aspect of the financials if a company doesn't pay one. Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment.

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better.

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The higher the ROI value the better.

Let's take a look at how Facebook and Toll stack up against each other on a financial basis in the table below. As we can see from the table, Facebook is definitely the better financial manager of the two as it beats Toll on all financial metrics I look for in a company.

Stock

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

FB

N/A

N/A

13.0

14.9

9.7

TOL

N/A

N/A

3.4

7.3

2.0

Click to enlarge

Wrap Up

I sold Facebook for a 17.88% gain or 36.06% on an annualized basis. Again, I only sold Facebook because it made me a great gain and I wanted to lock up some profits. Facebook is a very excellent company and will probably be in it again in the near future.

Facebook's future growth potential consists of being able to connect people with each other and making ad revenues through every facet of the billions of connections they make between people in a single day. Toll's future growth potential consists of being able to build new quality homes for America. The affordability of homes has become much better of the past few months as we remain in low interest rate environment, and I believe it should bode well for Toll.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long SPY, TOL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.