Stock Picks: M Down, TOL Up

With the crucial holiday shopping season upon us, investors are scrutinizing retailers for signs of how things will shake out. So far, it doesn’t look like there will be the unprecedented discounting of last year--but hopes might still need adjusting.

As evidence, Macy’s (M) shares fell more than 4% Wednesday after it reported a narrowed third-quarter loss, and its holiday outlook let Wall Street down. The department store expects to earn between $1 and $1.05 a share for the fourth quarter, falling shy of analysts’ consensus estimate of $1.17 a share. It also anticipates fourth-quarter same-store sales to fall between 1% and 2%.

But that guidance appears very conservative given the company's recent performance, according to a research note by Thomas Weisel analyst Lizabeth Dunn.

Also on the bright side, Macy's upped its outlook for full-year same-store sales, forecasting a decline of 5.4% to 5.7%, an improvement from an earlier forecast for a decline of 6% to 8%.

More clues about retailers’ expectations from the holiday season as JC Penney Co, Nordstrom, and Kohl's report their financial results this week.

The bottom line: Hold.

While department stores are struggling with how to get consumers in the doors and spending money, someone else is having luck luring consumers to big purchases. That would be luxury home builder Toll Brothers (TOL).

“The shock to the financial system in mid-September 2008 that shut down the capital markets appears to be mostly behind us,” said Robert I. Toll, chairman and chief executive officer, in a statement late Tuesday. Ticking off factors such as improved consumer confidence and the decline in unsold home inventories, Toll suggested that the new home market should be improving. “We sense that it is,” he added, “though slowly and through choppy waters.”

The company zoomed past estimates with its preliminary fourth-quarter results. It expects revenue of $486.6 million, which, while down 30% from 2008, compares well to estimates for $386.18 million per Thomson Reuters. Contracts rose 42% in units and 62% in dollars compared to the same period in 2008, and the contract cancellation rate was 6.9%, the lowest since 2005.

Stifel Nicolaus analyst Michael Widner estimates Toll Brothers finished its fiscal year with its highest market share since 2005 at 0.62%, and anticipates that will prompt a positive reaction in stock in the short term. Still, he sees headwinds for the sector increasing during the winter and has longer-term valuation concerns. “We find the stock near our post-correction fair value estimates today before applying any discounting for that still being a few years away,” wrote Widner, who has a sell rating on the stock.

Keefe Bruyette & Woods analyst Bose George had a different perspective. “The trends clearly are positive for the longer term outlook,” he said. Still, he remains “pretty cautious because beating year ago or current numbers is good, but in order for Toll Brothers or any of its peers to generate returns you need volumes that are materially higher than where they are.”

The bottom line: Hold. “Definitely give them credit, but the broader market needs to come back -- and that could be a while,” George said. “When we finally do get into recovery, they’re well positioned to do things, but in the meantime there’s really no catalyst to get things going.”