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?

Once upon a time, we didn't know what the bankers were up to. Now, thanks to the folks at finviz.com, it's easy to keep tabs on the stocks that financial institutions buy and sell. And the 170,000-plus lay and professional investors on Motley Fool CAPS can lend us further insight into whether these decisions make sense.

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

Companies

Recent Price

CAPS Rating (out of 5)

Inergy (NYSE: NRGY  ) $35.48 *****
Kodiak Oil & Gas (AMEX: KOG  ) $6.02 ***
Armour Residential REIT (NYSE: ARR  ) $7.66 ***
China Information Technology (Nasdaq: CNIT  ) $2.45 ***
OCZ Technology (Nasdaq: OCZ  ) $9.86 **

Companies are selected based on past-three-month changes in institutional ownership, as reported on finviz.com. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
Up on Wall Street, the professionals think these five stocks are the greatest things since sliced bread. (And by "bread," I mean money.) They've been …

  • Trusting OCZ to deliver on its promise to double (and perhaps triple!) its gross margin this year.
  • Betting that at 3.5 times earnings, China Information Technology really is as cheap as it looks, and not just another Chinese small-cap scam.
  • Seeing a lot of value, too, in Armour Residential, a real estate investment trust that costs just 6 times earnings and pays a 19% dividend yield.  
  • And hoping that when next year's earnings roll around, the currently unprofitable Kodiak Oil & Gas will look nearly as cheap.

Judging from the two- and three-star ratings these stocks receive on CAPS, however, it appears that Fools aren't quite ready to rush in and imitate Wall Street. Turns out there's only one stock on this week's buy list that wins applause from professional and individual investors alike: A "little" propane supply shop you've probably never heard of, called Inergy.

The bull case for Inergy
Just who is Inergy? CAPS member kansan1 introduced us to the company just last year:

[O]ne of the fastest growing MLPs in the US. It is often misunderstood and tied too closely to commodity fluctuations. It continues to buy infrastructure -- [therefore, its] income is largely fee based. These guys have integrity, are highly driven, and have put together a team like no other.

And if NiceGuyMax is right, "these guys" may also have a pretty bright future ahead of them. According to NGM:

[G]as will be our next fuel spike. We will convert to CNG/LNG for transportation. Propane use will go up. The infrastructure for this is growing.

But whether or not that happens in the future, today CAPS member woodlandstiger calls Inergy a "dividend play," plain and simple.

And yes, considering Inergy's huge dividend yield, that's understandable. At 7.9%, Inergy's annual payout trumps the meager 6.5% dividends at Suburban Propane (NYSE: SPH  ) and AmeriGas Partners (NYSE: APU  ) . (I jest, of course: 6.5% is pretty nice, too -- just not as nice as Inergy's divvy.)

Inergy: Buy these numbers?
But the problem with Inergy, as I see it, isn't the dividend at all. It's the stock itself. Remember, when trying to build wealth in the stock market, dividends are only half the equation, and maybe not even the most important half. (Cut a stock's price in half, and its dividend yield doubles. Hooray?) There's also the stock itself to consider, and that's where the bull case for Inergy breaks down.

Consider: At 21.8 times earnings, Inergy already looks kind of pricey for the 4% long-term earnings growth that analysts ascribe to it. Look under the hood, and you'll find that Inergy actually generated only about $55 million worth of free cash flow over the past 12 months -- at the same time as it was reporting $127 million worth of net earnings. Bulls may dismiss the 21 P/E as irrelevant so long as the dividend checks keep coming … but I wonder how they'd react if they knew the company was selling for 71 times free cash flow?

Time to chime in
Call me conservative, call me a Fool, but if I were in the market for a propane stock today I think I'd choose Suburban Propane or AmeriGas over Inergy despite their smaller dividend payouts. Both stocks cost less on a P/E basis than Inergy does. More importantly, both generate free cash flow greater than what they report as net income. To me, that makes either one of 'em a better buy than Inergy.

Of course, that's just my opinion. If you think I'm mistaken, feel free to set me straight. Head over to Motley Fool CAPS and tell me why I'm wrong.

Fool contributor Rich Smith owns no shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 560 out of more than 170,000 members. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 5:22 PM, NEMnyWtch wrote:

    Good article - some interesting ideas worth checking out.

  • Report this Comment On July 12, 2011, at 6:53 PM, gcmagone wrote:

    KOG is a "keeper".

  • Report this Comment On July 12, 2011, at 9:30 PM, toomuchgas wrote:

    The merger of NRGY and NRGP will doubtless enhance the payout to shareholders of NRGY but will take a year or two to get the benefit of eliminating incentive payouts to the former general partner (IMHO)

  • Report this Comment On July 13, 2011, at 12:44 AM, jekoslosky wrote:

    Count me out on CNIT. It may prove to be a killer stock, but I think it's too soon to trust any Chinese small caps. I'm not so sure I trust their large caps at this point.

    Here's my new China strategy: http://bit.ly/oTYQYl

  • Report this Comment On July 17, 2011, at 5:16 PM, dsalamon wrote:

    I've been looking at CNIT closely for the past few months. Here's my daily analysis on it: http://tradecnit.blogspot.com/.

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