Wall Street's Buy List

"Actions speak louder than words." There's more than a grain of truth to the old chestnut, I'll warrant. But why does the media focus so much attention on what Wall Street says about companies? After all, upgrades and downgrades are mere words; what really matters is how the big boys act.

Luckily for Wall Street watchers, the Internet has made it easy to find this out. All we need do is read MSN Money's list of which companies the institutions are buying. Of course, "Monkey see, monkey do" may not make for the soundest of investment strategies. Just as we view the professionals' words with skepticism, we might also want to think twice before blindly imitating their actions.

And yet, there are times when Wall Street is buying, and the smartest investors on Main Street agree. At Motley Fool CAPS, we track the opinions of 65,000-plus lay and professional analysts, then overweight the most successful raters' opinions, arriving at a "CAPS rating" of from one to five stars (five being the best). When opinions on Wall Street and Main Street intersect, that just might be the time to do some buying.

Here then is the latest version of Wall Street's Buy List, along with a summary of how CAPS investors view the companies:

Currently Fetching

CAPS Rating

KongZhong  (NASDAQ:KONG)

$6.70

***

China BAK Battery (NASDAQ:CBAK)

$7.78

***

China Sunergy  (NASDAQ:CSUN)

$9.15

***

Network Equipment Technologies  (NYSE:NWK)

$14.50

***

Alabama National Banc.  (NASDAQ:ALAB)

$77.92

***

Baidu.com (NASDAQ:BIDU)

$289.65

***

Companies are selected from the "Institutional Ownership Up Last Month" list published on MSN Money on the Saturday following close of trading last week. Price increase and current pricing provided by MSN Money on the same date. CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
For the most part, Main Street agrees with Wall Street this week, giving the majority of the professionals' favorite stocks above-average marks. And what do they like? In a word: China. Between KongZhong and Baidu, China BAK and China Sunergy, whether it's Internet services or energy that floats your boat, China is the place to be.

With no clear winner of CAPS players' affections, I'm going to profile what appears to me to offer the best value among these four firms: KongZhong. Let's first see why CAPS players like it, and then I'll explain why it seems to offer a fair price for investors.

The bull case for KongZhong
As funny as the name may sound, investors are seriously interested in this purveyor of "wireless interactive entertainment" -- games, ringtones, and similar electronic add-ons for cell-phone users.

ArnaudFroment offers us a few bullet points on the company:

Wireless Services. In China. Where the market penetration barely reach[es] 35% (v. over 70 in the US and more than 80 in Europe) ... Small Cap at only 315M as I am writing. Not only a smart and wise investment, this could be one of the nice surprises of 2007.

darkflame calls KongZhong an:

Extremely profitable cheap company with fast growth and a lot of money in cash. [Enterprise Value/ Earnings] is on the mid single digits. I [don't] know how honest is the management but at a first sight this company looks like a Bonanza stock.

And why is this "bonanza stock" in the bargain bin? The42ndDude explains that it's:

down because [China Mobile (NYSE: CHL  ) ] changed policies again, entered as a competitor ... However ... With $115 million in cash vs. a market cap of $190 million, a P/E of 10.9, a P/Sales of 1.85, a P/Book of 1.15, and an Enterprise Value/EBITDA of 3.76 (!!!) this is a great value play.

Now, it's worth pointing out that The42ndDude penned those comments back in May, when KongZhong was even cheaper than it is today. That said, of the four Chinese stocks listed above, it remains the best value. The stock's P/E of 24 compares favorably to China BAK's price of 63 times earnings, Baidu's 173, and China Sunergy's P/E of ... infinity. Granted, growth is only expected to average 18% per year over the next five years, but that still makes KongZhong the cheapest of the bunch.

Most importantly, however, KongZhong's P/E doesn't tell you half the value story. This stock generated $19.6 million in free cash flow over the last four quarters, giving it a price-to-free cash flow ratio of just 12. Subtract the firm's copious cash cache to arrive at the value of the business itself, and it's selling for an enterprise value-to-free cash flow ratio of 6. I call that cheap.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about KongZhong-- or even what other CAPS players are saying. We also want to hear your thoughts on the company. If you've got an opinion, we've got a place to voice it.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.


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