This Just In: Upgrades and Downgrades

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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.

A dubious blast from the past
In autumn 2007, I posed the question: "If Citigroup did breakfasts instead of banking, what would its trade name be? Answer: 'The International House of Waffles.'"

Citi spent much of last year waffling over whether the mortgage crisis had ended, upgrading homebuilders across the board one day, only to start downgrading them the next. At some point, the embarrassment must have become too much for the banker, as it apparently dropped out of the debate -- and dropped coverage unannounced -- leaving a handful of "buy" ratings flapping in the wind.

We know this because when we next heard from the banker, yesterday, the news read like this: "Citigroup began coverage of the U.S. home-building sector...." The company (re-) initiated Centex (NYSE: CTX), D.R. Horton, KB Home (NYSE: KBH), Lennar (NYSE: LEN), MDC (NYSE: MDC), and Ryland (NYSE: RYL) at "hold", while telling investors to buy Pulte (NYSE: PHM) and Toll Brothers (NYSE: TOL).

Hmm ... "began?"
Right. As if Citi had just noticed the industry's existence. As if it had not, in fact, blown calls on homebuilders Centex and Lennar just a few short months ago, underperforming the market by 27 and 33 percentage points, respectively.

Twice burned, six times shy
But Citi's attention deficit disorder aside, what does the banker think of the stocks today? Well, basically, with the exception of buy-rated Pulte and Toll Brothers, everything's a "hold" for now. Having been burned last year, Citi's taking a cautious stance today, predicting a weak market for new houses throughout next year, and for existing homes as far out as 2011.

Based on this forecast, Citi is emphasizing stocks boasting sufficient liquidity to ride out a multiyear storm, and argues that liquidity is more solid at both Pulte and Toll Brothers than at their rivals.

Foolish takeaway
If liquidity is Citi's primary focus, though, I think I have to take issue with its placement of Pulte on the buy list. I mean, Toll Brothers ... OK. With a debt-to-equity ratio of 0.68, it seems to have the best balance sheet of the bunch, and it's priced in the middle of the pack (on a price-to-book value basis). But Pulte is more heavily leveraged than Lennar, MDC, Ryland -- and one other homebuilder that Citi forgot to mention (see below). And Pulte's significantly more expensive than Lennar (again, going by P/B).

Were I a gambling Fool, wagering on homebuilders -- and betting that they're not going to write down the book value and blow my assumptions to smithereens -- I think I'd have to pick Lennar over Pulte.