Valuentum Exclusive Analysis for the Discerning Investor

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Thinking Slow: 3 Research Blind Spots That Changed the Investment World
Image Source: EpicTop10.com. We have to be on high alert about how our minds work. PBS recently delivered a four-part series examining how easily our minds are being hacked, and why it is so important to "think slow." When it comes to the active versus passive debate, does the analysis suffer from parameter risk? With respect to empirical, evidence-based analysis, does the analysis have the entire construct wrong? When it comes to short-cut multiples, are we falling into the behavioral trap of thinking on autopilot?

Lennar Continues to Navigate Weakness in the Housing Market
Image Source: TradingView. In the fiscal third quarter, Lennar’s new orders increased 12% to 23,004 homes. Excluding mark-to-market gains, fiscal third quarter net earnings were $516 million, or $2.00 per diluted share, compared to $1.1 billion, or $3.90 per diluted share in the prior year quarter. The average sales price of homes delivered was $383,000 in the third quarter of 2025, compared to $422,000 in the third quarter of last year. Gross margins on home sales were $1.4 billion, or 17.5%, in the third quarter of 2025, down from 22.5% in the third quarter of 2024. Lennar is navigating weakness in a housing market that is requiring additional incentives, hurting margins, while it deals with higher land costs. We’re not interested in Lennar’s shares at this time.

Lennar Sees Softness in Housing Market
Image Source: TradingView. On June 16, Lennar Corp. reported mixed fiscal second quarter results with revenue beating the consensus forecast but non-GAAP earnings per share missing the consensus mark. Total revenues fell to $8.4 billion in the quarter from $8.8 billion in the year-ago period, while second quarter net earnings, excluding mark-to-market losses on technology investments were $499 million, or $1.90 per share, compared to $3.38 per share in the same period a year ago.

3 Undervalued Stocks to Consider Buying Now
All told, we think these three names are ripe for the picking. UnitedHealth Group has clearly plummeted on bad headline news, while the market is not giving Nvidia enough credit for the sustainability of its technology. Alphabet is being weighed down by antitrust issues and the concern that artificial intelligence will permanently alter its business model, which we believe will not happen anytime soon, if at all. All three ideas are included in the Best Ideas Newsletter portfolio, where we include a diversified portfolio of ideas for members to consider. Happy investing!

KB Home’s Outlook for 2025 Better Than Expected
Image: KB Home’s shares have done well since the beginning of 2023. Looking to fiscal 2025, KB Home's housing revenue is expected in the range of $7.00-$7.5 billion, compared to the consensus forecast of $6.89 billion, with the average selling price in the range of $488,000-$498,000. Homebuilding operating income as a percentage of revenues is targeted at roughly 10.7%, which assumes no inventory-related charges. For the year, housing gross profit margin is targeted in the range of 20.0%-21.0% and assumes no inventory-related charges. Selling, general, and administrative expenses as a percentage of housing revenues is expected in the range of 9.6%-10.0%. We liked KB Home’s fourth quarter results and outlook for fiscal 2025 and what they imply with respect to the health of the housing market. KB Home doesn’t make the cut for any newsletter portfolio, however.

The Price-to-Earnings Ratio Demystified
Let's examine the price-to-earnings (P/E) ratio. The key takeaways are: 1) without using a discounted cash-flow model, the P/E ratio that should be applied to a company's future expected earnings stream can never be appropriately calculated, and by extension, 2) when investors assign an arbitrary price-to-earnings multiple to a company’s earnings (based on historical trends or industry peers or the market multiple), they are essentially making estimates for all of the drivers behind a discounted cash-flow model in one fell swoop (and sometimes hastily). As earnings for next year are often within sight and can be estimated with some confidence (though this certainly varies among firms), calculating the price-to-earnings ratio via a discounted cash-flow process, in our opinion, is of far greater importance than worrying about whether a firm will beat or miss earnings in its next fiscal year. Because the P/E ratio is a discounted cash-flow model that considers the long-term qualitative dynamics of a particular entity, cash-flow analysis remains the first and most important pillar of our Valuentum Buying Index. And finally, investors cannot ignore valuation analysis or the future. Valuation is an important driver behind stock prices, and it is based on future expectations that can only be estimated. This is just a fact of the markets.

Toll Brothers Ends Strongest Year Ever
Image Source: Toll Brothers. Looking to fiscal 2025, Toll Brothers' deliveries are expected in the range of 11,200-11,600 units with an average delivered price per home of $945,000-$965,000 and adjusted home sales gross margin expected at 27.25%. The company’s pace of deliveries is expected to be strong, but the company’s gross margin isn’t as strong as we would like, facing pressure from last year’s adjusted mark. SG&A, as a percentage of home sales revenue is expected in the range of 9.4%-9.5%, up from last year’s measure of 9.3%. Toll Brothers ended its fiscal fourth quarter with $1.3 billion in cash and cash equivalents and $2.7 billion in loans payable and senior notes. The company continues to return cash to shareholders in the form of buybacks and dividends. Though we don’t include Toll Brothers in any newsletter portfolio, the bellwether’s fiscal fourth quarter report indicates the housing market remains healthy.

Incentives Pressuring Lennar’s Homebuilding Gross Margin
Image: Lennar’s shares have done quite well the past several years. For the fiscal fourth quarter of 2024, Lennar expects new orders in the range of 19,000-19,300, deliveries of 22,500-23,000 with an average sales price of about $425,000. Lennar ended the fiscal third quarter with $4.04 billion of cash and cash equivalents and $2.26 billion in senior notes and other debts payable, net, good for a nice net cash position on the balance sheet. Though the company’s gross margin guidance for its fiscal fourth quarter came up short, with expectations of it being flat with the fiscal third quarter (22.5% versus consensus of 24.3%), the backdrop for the housing market remains strong and may grow stronger as the Fed engages in a rate-cutting cycle.

Toll Brothers Expects Demand to Remain Solid Into 2025
Image: Toll Brothers stock has done quite well during the past couple years. For its fiscal year 2024 guidance, Toll Brothers expects deliveries of 10,650-10,750 units (was 10,400-10,800) with an average delivered price per home of $975,000. Its adjusted home sales gross margin is targeted at 28.3% for fiscal 2024 (was 28%), while SG&A as a percentage of home sales revenue is expected at 9.4% for the year. Toll Brothers ended its fiscal third quarter with $893.4 million of cash and cash equivalents and $2.8 billion in total debt. Its net debt-to-capital ratio stood at 19.6% at the end of the fiscal third quarter. Though Toll Brothers’ backlog faced declines in its fiscal third quarter, we liked the increased guidance across its key homebuilding metrics.

Paper: 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.