This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include an upgrade for homebuilder D.R. Horton, Inc. (NYSE:DHI), balanced by a downgrade for its rival PulteGroup, Inc. (NYSE:PHM). Meanwhile, a big mortgage lender — JPMorgan Chase & Co. (NYSE:JPM) — gets a downgrade of its own.
Let’s begin with that one.
Foreclosing on JPMorgan Chase & Co. (NYSE:JPM)
Shares of too-big-to-fail megabanker JPMorgan Chase & Co. (NYSE:JPM) are mostly stagnant today, shrugging off the effects of a downgrade to hold from ace analyst Standpoint Research. That’s actually not surprising, though, considering how the analyst phrased its comments today.
Noting that JPMorgan Chase & Co. (NYSE:JPM), up 61% in value over the past year, has just hit Standpoint’s price target and is trading near “an all-time high”, costing 1.1 times book value and more than 9.4 times earnings, Standpoint thinks now looks like a good time to sell “into this maturing rally and lock in gains.” That said, Standpoint also admits the possibility that JPMorgan Chase & Co. (NYSE:JPM) shares will continue rising into “the low $60s”. The analyst simply doesn’t believe that this possibility justifies taking the risk that the shares will move the other way.
I suspect that’s the right call: 9.4 times earnings seems to me an entirely appropriate valuation on JPMorgan Chase & Co. (NYSE:JPM) Chase shares, given the stock’s 2.7% dividend yield and its projected 6.5% annual profits growth rate. (Which according to Yahoo! Finance, by the way, is a full two percentage points slower than the average banking stock.) Seems to me, the stock’s not overpriced by any means. But it is fairly priced, and that suggests limited upside for now. Standpoint’s right to be cautious.
Building up, and building down
Similarly, I find at least some sense in the changes of a pair of homebuilder ratings that Compass Point put out this morning. In twin announcements, Compass first downgraded PulteGroup, Inc. (NYSE:PHM) (to neutral), and replaced it with D.R. Horton, Inc. (NYSE:DHI) (at buy).
Why? Actually, when you look at the numbers, the answer’s pretty obvious: D.R. Horton, Inc. (NYSE:DHI) looks a heck of a lot cheaper than PulteGroup, Inc. (NYSE:PHM). It costs 7.4 times trailing earnings, to PulteGroup, Inc. (NYSE:PHM)’s 24.4; sells for 1.9 times book value to Pulte’s 3.3; and pays a small (0.7%) dividend where Pulte pays none. In all three respects, the stock certainly appears on its face to be a better bargain than Pulte…
Except that on closer examination, maybe it isn’t.