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 and worst ...
One week after Citigroup upgraded D.R. Horton (NYSE:DHI) to hold, shareholders of the homebuilder received additional good news this morning: UBS has likewise removed its sell rating on the stock.

The reasoning behind UBS' change of heart was remarkably similar to Citi's from just a week earlier. "Despite the near-term pressures D.R. Horton continues to face, driven by the overall weakness in the housing market and its exposure to entry-level buyers, we believe the recent pullback is overdone." Compare that to Citi's words: "Although the homebuilding industry and DHI in particular face many headwinds, we think the stock is washed out. Since 9/14/08 DHI has fallen ~63% versus the group which has declined ~40%. It now trades at ~0.4x adjusted TBV.” So basically, they both made a valuation call, but UBS didn't go as far.

Then again, D.R. Horton now trades closer to 0.7 times tangible book value. On the one hand, that suggests UBS may see something more in D.R. Horton than just "a cheap stock." On the other, it may portend a new downgrade from Citi because the stock simply isn’t as cheap as it was just a week ago.

And in fact, Citi did downgrade a homebuilder this morning -- making a clear "valuation call" against Pulte Homes (NYSE:PHM) as it downgraded the stock to hold. Said Citi: "Since last Monday the stock is up ~32.3% versus the homebuilder index and broader market which are up ~24.5% and ~14.1%, respectively...The fundamentals of the PHM story are unchanged and we would look to reload at a more compelling valuation...Given our bearish outlook for the homebuilding industry in the nearterm, we think the stocks remain fraught with risk."

And so it appears that at the same time UBS is becoming optimistic about this sector, Citi is turning bearish once again. Which of these two analysts, then, are we to heed?

Let's go to the tape
According to CAPS, we're better off going with UBS and its more bullish bent on the home builders. Although it's true that UBS is not always right in its predictions, its accuracy rating of 49% at least exceeds that of Citi -- 46%. Citi's record in the housing industry looks particularly spotty …

… whereas UBS has at least been doing well lately with picking companies whose fortunes are tied to that of the housing market:

Foolish takeaway
Is the housing crash over? Are home builders destined to crush the market, and should we be loading up on beaten-down home furnishers as well?

You're asking the wrong Fool. I've no better visibility into the future of the housing market than anyone else (with the possible exception of UBS). That said, I do suspect that when companies like D.R. Horton and Pulte are selling for less than the value of their tangible assets, you've probably got a pretty decent margin of safety. In any case, you're probably safer buying here than at Ryland or KB Home, where the stocks offer no discount to tangible book value.