Wall Street's Buy List

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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 115,000-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:

	Recent Price	CAPS Rating (5 max):
Collective Brands (NYSE: PSS)	$19.12	****
PacWest Bancorp	$29.79	*
Sterling Financial	$14.01	*
Fortress Investment Group  (NYSE: FIG)	$11.13	*
Colonial BancGroup  (NYSE: CNB)	$8.97	*

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 price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Everything bad is good again
Last week was ... what's the word I'm looking for? Insane. Illogical. Madness.

And in the aftermath, here we are again, once more staring at four disrespected stocks making the list of Wall Street's favorite equities. Suffice it to say, the world isn't looking any saner this week than last. (My guess: Wall Street is gambling that the Bailout will solve the banking sector's problems. But to me that seems a sucker's bet.)

But at least one stock making the list this week doesn't seem to have its future riding entirely on the whim of Bernanke, Paulson, & Associates. So today we put the question to the CAPS collective: "Does it feel good to Payless?"

The bull case for Collective Brands

• Let's let NetscribeRetail explain that rather oblique reference for me. Writing in December 2006, the CAPS member referred to the company by its then-name: "Payless Shoesource operates as a family footwear specialty retailer offering athletic, casual, dress shoes and accessories such as handbags and hosiery for women, men and children. The Company operates its business in two segments: Payless Domestic and Payless International. This largest footwear retailer in the Western hemisphere has 4574 retail shoe stores in US, Puerto Rico, US Virgin islands and Central American Region."
  
• One of the great things about CAPS is that with 115,000-plus investors, we're bound to have a few contributors who can offer firsthand experience with the companies they recommend. CAPS All-Star TheMastermind is one such investor. Writing last summer, TheMastermind confided: "As a former employee of this company, i must say, they have things going for them. They implemented a customer service systems … to increase sales and it is done by the retailers well since its fun. ... They also have a stricter payroll policy which in most cases, no one recieves overtime time pay. ... Last but not least, the shoes are becoming alot more presentable than before. Although i worked as a sales rep and assistant manager in Payless, i knew that i hated the shoes but the styles kept getting better and better which even caused me to get a couple pairs."
  
• And before we close, let's not forget the obvious argument in Collective Brands' favor. As seahawkdarrell1 pointed out in March: "in a recession folks want cheap shoes and that they have thier sales should soar."

So far, so good. Whether you believe we're in a recession already, or just staring down the barrel of one, Payless' sales are indeed soaring -- up 30% in the most recent quarter. Problem is, earnings were down more than twice that percentage. And here, Fools, is where we get to the real problem with Collective Brands: The profits -- and the price we're asked to pay for them.

Ignore for a moment the 182 price-to-earnings ratio, an anomaly caused by the tens of millions in noncash expenses for restructuring and legal settlements that Payless has booked over the past few quarters. Even if you value the company on its free cash flow, the $65 million that Collective Brands generated over the past year leaves it trading for nearly 29 times free cash flow -- too rich by far for a company expected to grow at less than 13% per year over the long term.

Now, I agree that in tough economic times like these, people may spend less time strolling the shoe departments at Macy's (NYSE: M) and Nordstrom (NYSE: JWN). They may very well shift their spending to Payless. But they might find the prices on shoes at Target (NYSE: TGT) and Wal-Mart Stores (NYSE: WMT) just as enticing (and the price on the latter's stock, while not exactly dirt cheap, is at least a bit cheaper than Collective Brands').

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Collective Brands, or what other CAPS members think. What we really want to know is whether you feel good about Collective Brands? Click on over to Motley Fool CAPS and tell us what you think.

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On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.