Stock Picks: DHI Up; CIEN Down

Shares of home builder DR Horton (DHI) added more than 2% Monday, after an upgrade and a steep decline at the end of last week.

Shares in the company sank 15% on Friday. Analysts at Citigroup Global Markets upgraded the stock to Hold from Sell Monday citing the recent decline, saying its risk-reward profile is now “in balance.”

That news added to some optimism in the broader housing market generated by the National Association of Realtors, which reported that existing home sales surged by 10.1% to 6.1 million in October, easily topping the consensus estimate for 5.7 million.

“Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November,” said NAR chief economist Lawrence Yun. “With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer.”

New home sales data, which should be more important to the home-building company, are due out later in the week.

“All it needs is home buyers; the price point where profits can be earned is as low as it has ever been in the company’s history, thanks to three years of cumulative write-offs and layoffs,” wrote BGB analyst Merrill Ross in a note on Friday, in which the analyst maintained a Hold rating.

The Bottom Line: “We continue to think the shares of DHI are ahead of reasonable expectations of profit, and we maintain our Hold rating,” wrote Ross. “We would, however, buy the shares on pullbacks below the $12 level for investors with the patience to wait for an extended holding period, because the company has a strong balance sheet and a solid sales franchise.”

On the downside, Ciena (CIEN) shares fell more than 8% after it announced it had successfully bid $769 million for Nortel’s optical networking and carrier Ethernet assets in a bankruptcy court-sanctioned auction.
Ciena, which sells software and network infrastructure solutions, will pay $530 million in cash and issue $239 million in convertible notes for a total of $769 million for the assets.

Gary Smith, Ciena’s CEO and president, said the purchase would help the company offer customers a way to switch to automated, optical Ethernet-based networking. “We will be intently focused on integration as we work together to deliver the benefits of this transaction to customers, employees and shareholders,” said Smith.

The Bottom Line: Nokia Siemens Networks, which lost out to Ciena’s higher bid, said a higher price wasn’t financially justified and Ciena shareholders appeared less than convinced as well.