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 160,000-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 price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.nce. CAPS ratings from Motley Fool CAPS.

Jobless recovery? What jobless recovery? The Department of Labor reports that U.S. payrolls grew by 162,000 last month (thanks to a little help from short-term 2010 Census hiring). The Dow is sticking stubbornly above 11,000, and neither the damage wreaked by news of Goldman Sachs' prosecution nor the continuing turmoil in Greece has been able to totally wreck the rally.

And yet Fools don't seem too impressed with how Wall Street is playing the recovery this week, and to be honest, neither am I. Not meaning to sound harsh here, guys, but it really does look to me like a "flight to trash." I mean, what do we have here, really? A couple of gambles on revenue-less R&D shops in PROLOR and Delcath? And a couple of super-small-cap energy plays in VAALCO and Cheniere? It really doesn't seem like a lot to get excited about.

Nevertheless, CAPS members do seem excited about one of these firms: VAALCO Energy. Let's find out why.

The bull case for VAALCO Energy
CAPS All-Star getrichdietrying starts us off with a general feeling: "Energy sector is rising and I think it will go up, up and up."

But what about VAALCO? There's plenty of energy stocks in the sea. Why buy VAALCO over any of the multiple alternatives? CAPS member cheatcountry likes the stock because of its "low debt and low price."

milkyway760 calls VAALCO: "A outstanding small cap energy company with working interest in various parts of Africa, UK, Texas Gulf, and Gulf of Mexico. Great management with the experience to guide through todays murky waters."

And CAPS All-Star Hogty clambers out on a limb to declare VAALCO the "Best chance to double your money 100% gain, in any oil stock. This company is independant ... and [will] sell to the big boys. As oil companies start expanding when oil prices climb back up (c'mon you know thats going to happen) then they will be buying from VAALCO who is aquiring the resources as you read this."

Double your money, or double your risk?
I wish I could join in the enthusiasm for VAALCO, but I cannot. Why not? After all, cheatcountry's right about the company's low debt -- in fact, VAALCO has no debt, and $80 million in cash. Its forward P/E ratio of less than eight also looks attractive. And -- wonder of wonders -- it's even generating cash! (Free cash flow for the past five years has averaged $21 million per annum.)

Yet I cannot shake the feeling that things are trending down for this company. Over the past five years, gross profit has declined at an average rate of more than 10% per year. And while analysts believe that things are turning around, they still only project 2% growth for the company, on average, over the next five years.

Meanwhile, when valued on the firm's "proven reserves" of oil (a more traditional metric when valuing oil companies), I see VAALCO as trading at a significant premium to oil majors like ExxonMobil (NYSE: XOM) Chevron (NYSE: CVX), and ConocoPhillips. Consider: At last report, VAALCO had only 7.4 million barrels of proven oil reserves on its balance sheet. Valued at the going rate of $84.42 per barrel, those in-the-ground reserves are worth about $630 million, or about 2.6 times the price of the company itself (its "enterprise value").

That sounds like a bargain until you consider that larger, steadier, more survivable rivals carry enterprise values that are even smaller fractions of their reserves' worth. Very roughly, both Exxon and Chevron boast proven reserves worth six times as much as their respective enterprise values.

Foolish takeaway
Is CAPS member getrichdietrying right about oil prices going up? Over the long term, I think so. Could VAALCO be undervalued on the basis of its in-the-ground reserves? Again, I don't disagree.

But to my Foolish eye, investors are pricing these shares on the assumption that VAALCO's larger oil brethren will pay a pretty premium to acquire the company and its reserves. And while I don't discount the possibility entirely, I still think that in a world where almost any oil major you can name is three times as cheap, there's little reason to gamble on a small cap like VAALCO.

Or so says me. But feel free to disagree.