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 120,000-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):

OM Group  (NYSE: OMG  )

$22.90

*****

Spartan Motors

$3.53

****

Reliant Energy

$5.17

***

SLM  (NYSE: SLM  )

$9.38

**

KeyCorp  (NYSE: KEY  )

$10.90

*

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.

Wall Street's most-bought stocks this week run the gamut of CAPS ratings, from loathed banker KeyCorp through tolerated electric utility Reliant, and all the way up to fan favorite OM Group.

Never heard of OM? Neither had I, but investors seem to think that this small-cap manufacturer of "specialty chemicals" has a big future in aerospace and hybrid cars. But don't just take it from me. Let's listen in as our CAPS members discuss the company and its prospects:

The bull case for OM Group

  • Last July, 2XHelix introduced us to OMG as a supplier of cobalt (among other things), which is used to manufacture: "batteries used in hybrid electric vehicles." Combine this prospect with reports in The Wall Street Journal that: "airlines worldwide want to replace their existing fleets with next-generation planes ... [requiring] exotic alloys and ceramic coatings that can cope with internal engine temperatures." Seems to me that this means OM's potential customers range from sky high engine makers like General Electric (NYSE: GE  ) and United Technologies (NYSE: UTX  ) , all the way down to earthbound automakers such as Ford (NYSE: F  ) and GM (NYSE: GM  ) .
  • So that's the big picture, future market trends view. But what about the stock price? norcevif pointed out in the beginning of October that OM Group is: "Priced below tangible book value, consistent earnings, a strong balance sheet."
  • BMWDriver56 essentially agreed a few days earlier: "OMG has a book value of $38 and forecast earnings of $5 per share, yet it only trades in the upper $20 range. When the economies of the world start to show signs of life this stock should be a big winner, although it may take a couple of years to realize it."
  • And just for chuckles, let's wrap up with a few words -- letters, actually -- from outoffocus: "OMG! This stock is like, totally undervalued and junk, and like, the p/e ratio is like so low, and like have you seen the balance sheet? It is so hawt! OMG! O.M.G!!"

Now, I appreciate a laugh as much as the next Fool, and OMG serves this purpose nearly as well as the now-defunct POSS used to. But I doubt the pinstriped professionals on Wall Street have been buying OM Group for humor value alone. So just how good a value is OM stock anyway?

Under most valuation metrics, it looks good indeed. As our CAPS members have already pointed out, OM sells for a mere fraction of its own book value. Its balance sheet is rock-solid, with nearly $90 million in cash. And the P/E can't be beat -- the stock sells for less than four times trailing earnings, yet is expected to grow its profits about 10% per year over the next half-decade. Is this one a dirt cheap dream stock? OM practically defines the concept.

If there's one quibble I have with the stock, it's the minimal free cash flow backing up OM's ultra-low P/E. To me, it's all well and good that OM boasts better than $215 million in profit as calculated under GAAP -- but personally, I'd prefer it if free cash flow amounted to more than 16% of that sum. It doesn't, and in fact, has only exceeded accounting profits at the company in one year out of the past five. 

Foolish takeaway
Is that reason enough to be leery of OM Group? To me it is. But perhaps you are of a more forgiving bent? If you see things differently, here's your chance to tell us why.

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

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 913 out of more than 120,000 members. The Fool has a disclosure policy.


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