Wall Street's Buy List

Actions speak louder than words, as the old saying goes. So why does the media focus so much attention on what Wall Street says about companies, instead of what it does with them?

Luckily for Wall Street watchers, the Internet brings us MSN Money's list of which companies the institutions are buying. True, we should be as skeptical of Wall Street's actions as we are of its words. But when the 92,000-plus lay and professional investors on Motley Fool CAPS agree with Wall Street's opinions, it just might be time for some buying.

Here's the latest edition of Wall Street's Buy List, alongside our investors' opinions of the companies involved:

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

Wall Street vs. Main Street
Main Street takes one look at Wall Street's fave five this week and wonders aloud: "What are you people thinking?" With just a single exception, every stock on Wall Street's buy list gets roundly panned by the CAPS community. Perhaps even more surprising is the identity of that one exception: a tiny direct marketer of other people's software and hardware called PC Mall.

Who is PC Mall, and why do Foolish investors love it, or at least fail to pan it? We're about to find out, as we explore ...

The bull case for PC Mall

• All-Star player NetscribeComptrs introduced us to the company in this write-up from the beginning of the year: "PC Mall, Inc. (MALL) is a rapid response, direct marketer of computer hardware, software, peripheral and electronics products ... It sells products using direct marketing techniques, direct response catalogs, dedicated inbound and outbound telemarketing sales executives, the Internet and three retail showrooms ... The company is largely selling products of world known giants Apple (Nasdaq: AAPL), Hewlett-Packard (NYSE: HPQ), Microsoft (Nasdaq: MSFT), to name a few."
• MPOWERD added at the same time that "PC Mall ... owns Mac mall ... the 1 U.S. direct marketing reseller of Apple computers," and believes that "Mac Mall should be able to ride [Apple's] novelty for the next few years."
• Turning to the numbers, CAPS All-Star floridabuilder gives PC Mall an "A-" on its "[f]undamentals ... Prior to 2/21/07 this stock had negative sales growth... [I]n Nov 2007 ... its sales growth rose to the high teens. On 2/11/08 the stock jumped again to a sales growth number of 38%. Earnings growth on this stock since March 2006 has almost always been in the 21% to 29% [range] ... However ... [it] moved up to 33% on 2/11/2008. I think this is very important. MALL has always shown good earnings growth numbers, but its sales growth was lagging. Now it is showing strong sales growth and earnings growth is picking up. Today it trades at a p/e of 8.64 which I consider very low for a stock with this type of sales and earnings growth."

Knowing how the PC business already subsists on razor-thin margins, I recoil at the idea of a company trying to piggyback on the PC makers. You'd think this would make for margins as thin as ... well, as thin as whatever is thinner than a razor's width. And in fact, it does. PC Mall earns just 1% profit margins on its sales, but like the saying goes -- it makes it up in volume.

No longer to be had for the P/E of 9 that floridabuilder identified, PC Mall's stock still sells for a very reasonable 12 times trailing earnings. With earnings growth pegged at 22% per year over the next five years, that makes the stock look severely underpriced even now. But you know what? This story gets even better.

According to its cash flow statement, this company generates more than twice as much free cash flow as it reports in net income -- $27.2 million over the past 12 months. Thus, the stock is actually selling for less than six times free cash flow. Seeing that, I now see why both Wall Street and Main Street are shopping at PC Mall.

Disagree? Feel free. Click over to CAPS and tell us why PC Mall is no buy.