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.
Who let the bulls out? Who? Who?
Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS), that's who. Over the past few days, America's bankers have gone hog wild (or perhaps bull-in-the-china-shop wild) for America's home builders, with first Goldman upgrading Lennar (NYSE:LEN) and KB Home (NYSE:KBH) to neutral Tuesday, then Bank of America reinitiating coverage with positive ratings on ... well, pretty much every other homebuilder in the market.
Lennar and KB Home? Buy 'em both, says B of A. While you're at it, pick up a few shares of:
- Pulte (NYSE:PHM), which is set to reap synergies from its purchase of Centex.
- Ryland, which, like KB Home, should benefit from a return of first-time homebuyers to the market.
- And Hovnanian, whose improved balance sheet will allow it to "participate in the industry recovery."
Heck, while you're at it, throw caution -- and logic -- to the wind. B of A thinks you should buy MDC Holdings because it has the least amount of money sunk into undeveloped landMDC gets a buy-rating for its conservative positioning, while -- without batting an eye -- B of A praises DR Horton for taking on more risk than average with its "speculative units." And yet, B of A warns investors away from Beazer for possessing a balance sheet that should be condemned, and Toll Brothers (NYSE:TOL) for focusing too much on the upper end of the market. (B of A thinks there's more room at the bottom.)
Now hold up just a sec ...
What? Are you worried about taking advice on homebuilding stocks from ... the same folks who got us into the housing market mess in the first place? If so, I don't blame you. Despite the fact that Goldman is widely viewed as the proverbial "smartest guy in the room" for stockpicking, and B of A's demonstrated record of being that guy (as confirmed by its record on CAPS), investors might want to think twice about taking advice from these bankers. Because as you can see from the comments B of A is making up above, there's not a lot of premium being placed on logic here.
In illustration of which, let me pluck just one company out of the plethora receiving new ratings this week and show you how the bankers are stepping on each others' toes with it: Pulte Homes.
What to do with Pulte Homes?
If you ask Goldman, it thinks Pulte is perhaps the one stock in the entire construction industry that it would not touch with a 22' extension ladder. Goldman believes that Pulte's "industry low margins" make it all but impossible for the company to earn a profit in 2010. And indeed, it's hard to argue with this assessment -- or Goldman's advice to sell the stock.
And yet, as I mentioned up above, Bank of America thinks you should buy Pulte ... along with pretty much everybody else in the homebuilding industry. (And perhaps corollary industries as well. Around the same time everybody else was getting bullish on housing, rival analyst Oppenheimer was telling folks to pick up shares of Home Depot (NYSE:HD), and upped its target price on Lowe's.)
They may be right ...
Once Pulte's merger costs fade into history, and the company begins to reap cost savings from its larger scaled operations (buying in bulk more wood, windows, shingles, and so on), the company's margins should improve. Consensus estimates suggest that Pulte could return to profitability as early as fiscal 2011, with cyclical earnings cresting in 2012 at an estimated $1.14 per share.
... or they may be crazy
That said, even in the industry's salad days circa 2005, Pulte was only pulling down 16% gross margins; meanwhile, most everyone else was grossing in the 20s. Bank of America may believe that all housing bets are equally good, and most homebuilding stocks equally worth of "buy" ratings. But they've been wrong before; I think they're wrong again on this one.
My advice: If you're looking for "best of breed" in the housing industry, Pulte ain't it. I'd suggest you look elsewhere.
