5 Wall Street Buy Calls That Will Shock You

Goldman Sachs recently rated Berkshire Hathaway a buy.

That's not shocking.

Not just because Berkshire Hathaway has a large investment stake in Goldman Sachs. And not just because Warren Buffett, aka the greatest investor in the world, runs Berkshire. And not just because it's an all-star team of quality businesses and investments, from full ownership of GEICO and Fruit of the Loom to large stakes in Coca-Cola and Procter & Gamble.

Most of all, it's not very shocking because the Berkshire Hathaway story is backed up by the numbers, both historically and presently. It's had a decades-long run of creating value, growing its book value by a 20% compounded rate since 1965. Presently, Berkshire is trading for a discount to its historical price-to-book ratio.

Now, you may think Buffett and Berkshire are overrated, you may nitpick some of Goldman's modeling assumptions, and you may even rate Berkshire Hathaway a sell. Still, all except the most stubborn bear will grant that the buy thesis is at least a reasonable argument to make.

Unfortunately, that's not always the case with Wall Street.

Five buy calls that will shock you
I've explained in the past how Wall Street tends to have a bullishness bias. In other words, if the stock trades, it's at least a hold. On the off chance Wall Street has a consensus sell rating on a stock you own, you've most likely already lost your shirt.

Still, some buy calls are so outlandish it's shocking.

Source: Capital IQ, a division of Standard & Poor's.
*Trailing 12 months.

You'll notice that the companies in the table are all trading near their 52-week highs. That's not damning evidence, but it's a bad sign if, like me, you tend to troll the 52-week low list for bargains.

Next, notice the high debt-to-capital ratios. Except for a few industries (like utilities), a debt-to-capital ratio above 50% sets off a red flag. For Vonage, Sun Communities, and US Airways, that ratio is over 100%. If you're wondering how debt can make up more than 100% of capital, it's because these companies have lost enough money historically to turn their equity negative.

It's risky for profitable companies to hold these levels of debt. All of these companies are losing money and would have to have pretty significant profitability turnarounds to justify their current share prices. Not only that, they haven't been profitable in years. The most recent sighting was Las Vegas Sands in 2008; Vonage hasn't posted a profitable year as a public company.

Yet they're all Wall Street buys.

Better places to look
For some better options, I searched for stocks that are down 25% or more from their 52-week highs, that have less than 50% debt in their capital structure, and have trailing profits. In other words, the opposite of the five stocks above. Graphics chipmaker NVIDIA (Nasdaq: NVDA), seed and pesticide giant Monsanto (NYSE: MON), and pharmacy Walgreen all fit the bill. My colleague Matt Koppenheffer recently wrote about the prospects for NVIDIA and Monsanto, which were two of the five biggest S&P 500 droppers during the first half of the year. They face bigger near-term challenges than Walgreen but also have more potential upside.

They all happen to be rated buys (or on the borderline between a buy and a hold) by Wall Street, but Wall Street's opinion has proven to be pretty irrelevant.

What I do consider relevant are your thoughts. Share your words of wisdom about any of the companies I've mentioned in the comments section below.

For more stock ideas, check out 5 Stocks That Are Cheaper Than You Think.