Today's 3 Stock Picks: DHI, TIF, ADBE

Another government plan to address the nation’s housing crisis pushed up shares of home builders, including D.R. Horton (DHI), the Fort Worth, Texas, construction outfit.

The possibility that the U.S. Treasury Department will temporarily push banks to lend at rates as low as 4.5% for first-time home buyers marks the second major government initiative in as many weeks to address the housing crisis. On Nov. 25 the Fed said it would buy up to $600 billion of debt from housing-related government-sponsored enterprises Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks -- as well as mortgage-backed securities (MBS) backed by Fannie, Freddie and Ginnie Mae -- to reduce the cost and increase the availability of credit for home buyers.

D.R. Horton Chief Executive Don Tomnitz saw it coming long ago, though not to this extent. On a March 7 conference call last year, Tomnitz foresaw the home-building collapse with grim accuracy, saying, “I don’t want to be too sophisticated here, but ’07 is going to suck, all 12 months of the calendar year.”

He didn’t go far enough. The knock-on effects of the subprime mortgage crisis created a housing crisis, a credit crisis and a full-blown financial crisis that has turned the U.S. and world economies upside down.

Anna Torma, an analyst with Soleil Securities, says that government moves will help home builder stocks, but that the broader economy must improve as well, and that is far from certain.

“You’re already seeing some response to lower mortgage rates, and we’re seeing a demand boost,” she says. “But the offset to this, that that is, the competing factor, is that if we continue to see strong unemployment, you’ll see a significant segment of the housing sector remain under pressure.”

Thursday’s news is a boost, but it isn’t grounds for a sustainable rally, and homebuilder stocks will likely remain range-bound, Torma says. Additionally, D.R. Horton was slower to cut its prices than some competitors, such as Lennar (LEN). Despite a strong balance sheet, that will hinder its fundamentals.

“We believe companies that were more aggressive at the outset [of the sector crash] are going to be better positioned,” Torma says.

Bottom Line: Hold
The sector bottom for home builders remains a moving target, and anyone holding the stock should be ready for a long wait for a real recovery, not a government-supplied jolt.

Jeweler Tiffany (TIF) offered the dreaded “voluntary retirement incentives” to 800 U.S. employees, underscoring the severity of the current recession hitting the luxury market. Details of the cost-cutting plan, combined with retail news that wasn’t quite as bad as expected, helped push shares up Thursday.

In a Tuesday filing with the Securities and Exchange Commission, Tiffany said “in light of the recent economic downturn, management is now making plans to adjust staffing levels” and last week offered voluntary buyouts to qualified employees as it tried to trim expenses.

The company announced the general plan to cut jobs last week when it released third-quarter earnings of 35 cents a share -- less than half the profit it booked in the year-ago period.

Before the September acceleration of the economic crisis, high-end retailers seemed relatively insulated from economic woes and spending cutbacks, but that has changed on a global basis, Chief Financial Officer Jim Fernandez said on a Nov. 26 conference call.

“The environment is obviously filled with uncertainties about how customers will be spending in the coming weeks,” he said.

Brian Sozzi, an analyst at Wall Street Strategies, wrote Tuesday that the diamond dealer was far from alone in falling off its perch.

“High net worth consumers have apparently crawled up in bunkers with their tattered portfolio statements, as evidenced by the [third-quarter] earnings results posted by upscale department stores and jewelers,” he wrote. “What is also negatively impacting the sector, in our opinion, is drying up of demand from aspirational consumers, which are those who traded up to luxury goods when times were oh so fruitful.”

The analyst maintains that Thursday’s share-price move isn’t sustainable. “I don’t believe it’s a structural change,” Sozzi says of the buyout plan. “The pop today is based on chain-store sales data. The market was looking for Great Depression II-type stuff, and the numbers were bad, but weren’t as [bad as] they could have been. When December sales figures come out, that when it’s going to come home to roost.”

Bottom Line: Sell
Diamond aren’t an investor’s best friend in a recession, unless they’re being traded for bread and a bowl of hot soup.

Software maker Adobe Systems (ADBE) printed up bad news ahead of schedule, as the maker of Acrobat and Photoshop cut its outlook and said it would shed 600 jobs.

The San Jose, Calif., company is scheduled to report fiscal fourth-quarter results Dec. 16, but on Wednesday it said lower-than-expected demand for its Creative Suite 4 software package would hit earnings and revenue hard.

“The global economic crisis significantly impacted our revenue during the fourth quarter,” Chief Executive Shantanu Narayen said in a prepared statement. 

Looking at the dismal state of the economy, Kaufman Brothers analyst Barbara Coffey said buyers of business software in the battered advertising sector are scarce.

“To some degree we are not surprised. Advertising and marketing are one of the first areas in a company to be reduced in a downturn,” Coffey wrote Thursday. “Also, while we do think that [Creative Suite 4] is a ‘must have’ release, in these uncertain times, it does not seem to be a ‘must have now’ release.”

It’s not that Adobe isn’t making good products, but rather that companies are getting by without upgrading to new ones.

“We believe the soft demand is a function of a worsening environment,” Coffey wrote. The five biggest advertising sectors are financials, telecom, automotive, retail and consumer goods, she noted, and “presently each of these verticals is being severely impacted by a weak environment and hence a reduction in advertising.”

Bottom Line: Hold
A company that depends on the fortunes of so many other corporations is going to move with the market’s momentum, and that means shareholders will simply have to ride out the bad times.