This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Multinational megabank Citigroup rolled out of bed early this morning, but instead of slapping the snooze alarm and catching some extra Zs -- as investors might have wished -- it slapped downgrades on nearly every stock in the housing sector. D.R. Horton (NYSE:DHI), Hovnanian, KB Home (NYSE:KBH), Lennar (NYSE:LEN), Pulte (NYSE:PHM), Toll Brothers (NYSE:TOL), and Ryland all lost their buy ratings and were knocked down to hold.

Why the blanket downgrades? Citigroup cited "excess inventory" still in the housing sector, and predicted that "order trends may remain in negative territory through year-end," limiting the prospects for growth in share prices. That said, the analyst emphasized that "the primary change in our stance is with respect to timing." Citigroup still thinks the sector is "undervalued relative to [its] longer-term fundamentals."

So in a nutshell, what we have here is a peculiarly made-for-CAPS situation: Citigroup admits that all it's trying to do is time the bottom of the housing cycle, rather than making a judgment based on the companies' intrinsic worth. In so doing, it naturally invites the question: Just how good is Citigroup at calling tops and bottoms in housing?

Well? How good is it?
Let's turn to Motley Fool CAPS to find out. Overall, Citigroup boasts an impressive record. Just shy of "Wall Street's Best"-status, its combined CAPS rating of 95.27 puts it within the top 5% of CAPS players. But for housing stocks in particular, its record is nothing short of miserable. Here's how Citigroup has fared on the seven stocks that got the ax this morning:

Briefing.com records Citigroup as endorsing these stocks long ago, and sticking with its endorsement (the seven buy ratings all date from either February, June, or September 2005). So I'm a bit surprised to see Citigroup take such a short-term-ist viewpoint today. The banker clearly missed calling the "housing top." As these disastrous scores show, the damage has already been done.

Foolish takeaway
Considering that Citigroup reiterated its faith that "the homebuilding stocks are undervalued relative to their longer-term fundamentals," I'd rather see it grit its teeth and endure the rest of the pain, waiting for its assessment to be proven correct. It just seems the more intellectually honest thing to do.

After all, that's just what Citigroup is doing with four other homebuilders -- Standard Pacific, Centex, MDC Holdings (NYSE:MDC), and Meritage Homes (NYSE:MTH) -- each of which was spared the ax this morning. Citi calls these four "mispriced relative to the group" (read: relatively cheap). But in light of the banker's calling the whole sector cheap, I fail to see why it would choose to cut bait on some, and let ride its bets on the others.

(Psst! Did you know that at Motley Fool Hidden Gems, we happen to agree with Citi on one of its buy ratings? And that at Motley Fool Stock Advisor, we like another one? Click here and here for free trials to either service -- or both! -- and find out who we like.)

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 518 out of more than 50,000 players. The Motley Fool has a disclosure policy.