Wall Street's Buy List

"Actions speak louder than words." There's more than a grain of truth to that 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, but what really matters is how the big boys act.

Luckily for Wall Street watchers, the Internet has made it easy to find this out, too. All we need to 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. Even 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 75,000-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 Wish List, along with a summary of how CAPS investors view the companies:

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

Wall Street vs. Main Street
Main Street investors have mixed feelings about Wall Street's top picks this week. Most stir below-average enthusiasm among our rank and file, and there's one they're ambivalent about. But CAPS players see some promise in at least a couple of Wall Street's faves. Rio Tinto -- that one's a gimme in light of the ongoing global commodity boom. Instead of taking the easy route, let's spend a bit of time getting to know a more obscure player, flash memory drive- and card-maker STEC, Inc.

The bull case for STEC, Inc.

• Several of our CAPS "All-Stars" are showing their horns on this one. mait77er is first out of the gate: "Flash drive technology is starting to conquer the market because mobile is the key word when it comes to gadgets. Flash drives are ultra energy saving so they are great to extent battery life of mobile devices. Even Sony is starting to use Flash drive based hard drives in its laptops."
• OK. But remind me -- what role does STEC play in this industry? sleepyseth explains: "They have a rapidly expanding product line of over 2500 products now, which should help provide more stability than is normally associated with a company this size in this industry and should help cushion them from any one product not doing well."
• In fact, writing back in January, CAPS All-Star pennysplants argued that STEC has a "[n]ear monopoly on Flash Memory Market. Consumer market, military market, and enterprise market. Sell-off of semi-conductors/tech today [Ed.: Remember that this pitch is nearly a year old] (combined with major sales of head honcho's stock) presents a buy-in opportunity. I still think may be overvalued in the short-term. But, for the patient investor, a really neat opportunity."

This last post provides us a welcome reminder of how valuation matters in investing; why buying even a good company with a "near monopoly" can be risky if you know the price isn't right. Even after its recent run-up, buying STEC at the wrong price has cost pennysplants nearly 28 points of S&P 500 underperformance. (Not meaning to rub it in. I'm just saying ...)

Keeping that lesson in mind, let's take a look at STEC's valuation today. The stock sports a 27 trailing P/E, against analyst expectations of 18% long-term profits growth. That makes for a 1.5 PEG -- hardly a screaming bargain, but not yet unreasonable. But this story gets worse. Reviewing the firm's cash flow statement, I find that STEC generated only $8.7 million in cash profits over the last 12 months, versus net income reported under GAAP of $14.8 million, excluding extraordinary items. Divide the firm's market cap by its cash profits, and the valuation jumps to a much pricier 55 times free cash flow. In my humble opinion, that's too much to pay for an 18% grower.

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