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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Mortgage rates are as low as they've been for years, the Fed's set to pump $600 billion into the economy, and President Obama seems intent on sealing a deal with congressional Republicans to keep taxes low through 2012. Is this how you spell Recession Relief? Could 2011 be the year to pile back into housing stocks like Pulte (NYSE: PHM) -- now trading near its 52-week low -- as newly flush homebuyers rush to grab affordable homes, and invest in inflation-resistant real estate all in one fell swoop?

It might be. Taking a similar tack, FBR Capital moved this week to refine its bets on which home retailers might best profit from a revival in the American real estate market. On Thursday, FBR knocked Lowe's (NYSE: LOW) down to "market perform" on concerns over "earnings visibility." But the analyst took a much more optimistic view of the company's archrival, Home Depot (NYSE: HD).

According to FBR, Home Depot is beginning to recapture market share lost to Lowe's in years past. Fellow analyst Piper Jaffray almost immediately joined in, saying that Home Depot stock is worth more than it previously thought. As margins expand, Piper sees Home Depot hitting $32 within a year. Apparently, this makes Home Depot the better way to play a revival in the housing market.

Or does it?

Let's go to the tape
Do you want to listen to FBR for advice on investing in home-improvement stores? At first glance, you might not think so. While it's one of the best analysts we track on CAPS, ranking in the top 10%, FBR's never been considered a leading light in specialty retail. Roughly 53% of the time, its recommendations there go awry.

That said, if you factor out clothiers and auto-parts stores, and focus on retail shops whose fortunes are more tied to homeowners' "nesting instincts," I think you'll agree that FBR's record here has been more than respectable:

I'd also point out that in an industry which has seen share prices rise to (ahem) optimistic levels, Home Depot and Lowe's both look pretty reasonably priced to me. Selling for 18.6 and 18.8 times earnings, respectively, and boasting low-to-mid-teens growth rates and modest dividend payouts, I consider both Home Depot and Lowe's superior stock ideas relative to, say, Sherwin-Williams (NYSE: SHW) and its single-digit growth rate.

And all three of these stocks look like bargains next to Lumber Liquidators (NYSE: LL). This housing-industry upstart's 19% annual five-year growth rate has inspired investors to pay more than 24 times earnings for a company that's done nothing but burn cash for the past two years.

There's certainly logic to FBR's recommendation of Home Depot this week. I personally don't see much difference in the valuations between Home Depot and Lowe's -- they both look about fairly valued to me. But FBR seems to see something in the market share dynamics that makes Home Depot look more attractive.

Good luck, FBR. You'll need it!
Unfortunately, around about the same time FBR was transferring its buy rating from Lowe's to Home Depot, the housing-market experts over at Zillow.com published a report predicting very bad times ahead for the U.S. housing market.

Record-low mortgage rates, continued Fed largesse, and tax-cut promises notwithstanding, Zillow tells us that the value of U.S. housing stock is set to end this year $1.7 trillion lower than it began. On $17.1 trillion in housing stock, that equates to about a 10% drop for 2010 -- a drop that Zillow warns is "likely to continue" in 2011, and which may not reverse itself for "years" to come.

If Zillow is right, then it may not really matter whether Home Depot steals market share from Lowe's next year, or vice versa. If home prices decline, taking home equity with them, then demand for home-improvement products as a whole could still suffer. In which case, Home Depot and Lowe's might become two oligopolists fighting over the bigger piece of a shrinking pie.