Goldman Upgrades Lehman Rating, Citing Attractive Valuation

When Don Corleone spoke of keeping his friends close, and his enemies closer, he had a vicious, backstabbing crew in mind. Maybe that's not so far off from Wall Street. It's a tough scene when analysts study their competitors, often playing out more like a soap opera with tit-for-tat maneuvers than straight analysis for the investors.

Goldman Sachs' banking sector analyst Richard Strauss raised his rating on fellow Wall Street bigwig Lehman Brothers(LEH Quote) to market outperformer from market perform -- a move that comes a couple of weeks after Lehman upgraded Goldman(GS Quote) to buy from market perform.

Strauss writes that the rating change "is mostly a valuation call, but also reflects the company's improved positioning in the current environment." The note indicates that the move "reverses our February downgrade when Lehman shares approached 3 times book." The note continues that "while the stock has fallen substantially since February, we now see opportunity."

While the stock has fallen 28% from its highs, the analyst writes that the drop "is only modestly less than the group average, even though Lehman's estimates have held up comparatively well." Goldman has cut Lehman's estimates by less than 5% since last fall, according to the note, while the firm's industry-wide estimates have dropped by 15%. And even were Goldman to make further cuts to their industry outlook, Strauss still views Lehman as a compelling investment.

Still, there are some doubts. "The reason we are not going up to a full [buy] is that fundamentals do remain tough for the Street generally but we are signaling our belief that valuation is compelling and investors should be prepared to get aggressive."

Whether this is a qualification for not being too aggressive, or for not matching Lehman's last upgrade of Goldman, Lehman was still trading up more than 5% in morning New York Stock Exchange action, adding $3.30 to $66.