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 ...
Is the recession over? Warren Buffett says it is, and across the market, the craziest kinds of stocks are racking up the most insane gains. But all good things must come to an end, and according to two analysts who weighed in on the housing sector yesterday, the end is near for Pulte Homes (NYSE: PHM).

On Tuesday, the market mavens at Credit Suisse argued forcefully that with no new homebuyer tax credits to support them, new home sales are fated to fall, perhaps as early as May. In anticipation of which, Credit Suisse downgraded each of NVR and KB Homes (NYSE: KBH) to "neutral" -- and cut Pulte to "underperform."

Underperform what?
The rest of the stock market. But in case that's not clear enough for you, a second analyst made the bear case against Pulte "crystal." Initiating coverage on the homebuilding sector yesterday, Stifel Nicolaus echoed Credit Suisse's sentiment on KB, expressed similarly neutral opinions on Lennar (NYSE: LEN) and Ryland Group (NYSE: RYL), and took a sledgehammer to Pulte, advising investors to sell it (and while they're at it, to dump MDC Holdings, as well).

And you know what? They're probably right.

Let's go to the tape
I say this for two reasons -- the first being that both of these analysts boast simply stellar reputations. Credit Suisse, for example, ranks among the top 10% of investors we track on CAPS. In part, this is due to its superb record in oil stocks, where its recommendations of stocks like Apache Corp (NYSE: APA) and Anadarko Petroleum (NYSE: APC) are just crushing the market's returns. But Credit Suisse is no slouch in the housing sector either.

As analyst after analyst have fallen on their collective faces trying to gauge the future of this industry, Credit Suisse has managed to maintain a record of 58% accuracy on its housing picks, racking up big gains on stocks like ...

... and yes, on Pulte as well. Over the course of five separate buy-and-sell recommendations made over the past few years, Credit Suisse has racked up an astounding 138-point lead over the market on this single stock.

Hold up a sec. You said there were two reasons.
Oh, yeah. The second reason -- that would be Stifel. You see, while having just initiated coverage in this sector, Stifel may not have a record on homebuilding stocks just yet. However, across the length and breadth of the stock market, Stifel has proven itself to be if anything a better investor than Credit Suisse. In fact, according to our statistics, Stifel ranks among the very best of Wall Street analysts in the market. And what does Stifel have to say about homebuilding?

After running an exhaustive, 42-page report on the industry, the demographics underlying it, and its prospects for growth, Stifel concludes that homebuilders are in for years of slow to no growth: As we work our way through an immense backlog of unsold homes, earnings in the homebuilding sector will grow at only 3% for the next three years. "Normalized earnings" won't return until 2014 at the earliest. Meanwhile, Stifel finds Pulte overvalued by a good 28%, with room for 22% in downside.

Nor are Stifel and Credit Suisse the only analysts coming to this conclusion. On Motley Fool CAPS, ace independent stockpicker FloridaBuilder2 argued last week that until we clear out the foreclosures on existing houses, stocks in new-home builders simply cannot revive. Pulte in particular is carrying "really deep positions of land and this is going to be a constant drag on earnings" as the value of that land gets written down. In short, multiple homebuilders are going to be missing earnings estimates in the quarters and years to come -- and Pulte will be one of the biggest losers.

I agree. Priced well above book value, and selling for more than 32 times next year's optimistic earnings forecast (and remember, Stifel says it's going to miss those estimates), Pulte simply costs too much for the 3% growth Stifel is projecting. (For that matter, Pulte would be too expensive even if Pulte achieves the consensus figure of 9% growth.)

When all else fails ...
Oddly enough, just as Credit Suisse and Stifel were putting the finishing touches on their recommendations, Pulte Homes changed its name to "PulteGroup." But whatever the name, I agree with the analysts.

Despite a few surprise success stories, homebuilding stocks in general have lagged the market badly over the past year. How do you tell a bargain stock from a value trap? Find out here.