Wall Street's Buy List

Actions speak louder than words, as the old saying goes. So why do 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)

Hatteras Financial (NYSE: HTS  ) $28.82 *****
Frontier Communications (Nasdaq: FTR  ) $3.50 ***
AIG (NYSE: AIG  ) $28.99 **
Threshold Pharmaceuticals (Nasdaq: THLD  ) $6.80 **
LinkedIn (Nasdaq: LNKD  ) $98.52 *

Companies are selected based on past-3-month changes in institutional ownership, as reported on finviz.com. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Up on Wall Street, the professionals think these stocks are the greatest things since sliced bread. But are they really the best places for you to put your money?

Not all Fools are convinced. For example, LinkedIn -- the closest thing to Facebook that folks could invest in before the FB IPO (and how great did that one work out, huh?) gets only a single, solitary star on CAPS. Granted, at a share price of 675 times trailing earnings, investors probably couldn't afford giving this one a second star. And now that Facebook is out there itself, and selling for just a fraction of LinkedIn's P/E, investors have to wonder whether there's still as much reason to own LinkedIn at all.

Speaking of pricey stocks, Threshold Pharma certainly fits the bill. It has no profits. No free cash flow, either. Threshold does have an experimental cancer-fighter TH-302 in development that's gaining momentum as it moves through clinical trials. Investors are betting that these numbers will start looking better if TH-302 gets FDA approval. Until then, though, the stock remains speculative.

Moving on to Frontier, we finally begin to approach reasonable-seeming valuations, and Frontier pays a hefty 11.4% dividend yield to boot. Besides the declining landline industry, the real issue with Frontier, as I've mentioned before, is its debt -- nearly $8 billion net of cash on hand, towering more than twice as high as the stock's own market cap, and interest payments eat up more than half of the company's operating earnings.

Two-star-rated AIG is actually my favorite stock on the list, sporting a price-to-book ratio of 0.50, a forward P/E ratio eight, and long-term earnings growth estimates of 11% per year. Nevertheless, CAPS investors still see another stock as more attractive -- and I'll defer to the majority. Fools have rated Hatteras Financial the top stock on Wall Street's Buy List today -- rated five stars, no less -- so that's the one we'll focus on. 

Without further ado...

The bull case for Hatteras Financial
Why do Fools love Hatteras? JaxxBrat calls it "a strong REIT in a strong sector and it pays high yield" -- 12.5%, which is even better than the payout at Frontier.

CAPS member chuckshipley sees every likelihood that Hatteras will be able to keep churning debt into mortgage-backed securities gold, and paying out the profits in dividend form, because after all, "we've been promised 2 more years of low interest rates."

And as CAPS All-Star cjlee001 reasons, so long as "there's free money ... thanks to the fed," Hatteras should be able to make a profit off of borrowing it, and investing it in mortgages.

Are these Fools right? So far, they are. Hatteras' quarterly dividend recently declined slightly due to a declining interest rate spread, but it's still quite high. If it can keep this up, then today's P/B ratio of just 1.06 is a fair price to pay for investors attracted by Hatteras' strong dividend yield.

Yet even so, I can't help feeling just a tiny bit nervous about the idea of investing in a company that's leveraged 7 to 1. There are just so many ways this could all blow up -- a drop in long-term interest rates, which reduces Hatteras' income, an eventual hike in short-term interest rates, which raises the cost of borrowing for Hatteras.

Personally, I'm more comfortable investing in stocks that offer lower, but more rock-solid dividend yields of the traditional variety, than investing in REITs like Hatteras -- but that's just me. It's a big, wide market out there, and values abound for investors of many strategies. Is Hatteras the kind of stock you want to own?

Click over to Motley Fool CAPS now, and tell us why.

Fool contributor Rich Smith does not own 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. 325 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of LinkedIn. Motley Fool newsletter services have recommended buying shares of LinkedIn. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (2) | Recommend This Article (3)

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 May 29, 2012, at 1:09 PM, daillengineer wrote:

    the Fools love LNKD, but riddle me this: how on earth do you justify a near 4-digit P/E ratio? i just don't get how anyone could hype LNKD. makes no sense at all.

  • Report this Comment On May 30, 2012, at 8:35 AM, caution1st wrote:

    Readers should beware that in regards to Threshhold, that the company has plenty of cash.

    In Q1/2012 the company reported a $115 million loss of which more than $108 million was a NON-CASH item. The loss arose from the sharp rise in the company's stock price this year that has resulted in stock options and warrants previously issued being exercised. Many of these warrants and options had been issued when the stock was under $2.00 per share. The stock closed on March 31, 2012, at $8.80 per share.

    This year, Threshold is receiving large upfront and milestone fees of about $82.5 million from a deal negotiated with Merck KGaA in February. The total deal is estimated at $525 million.

    Since, the end of the first quarter, Threshold has stated they have received an additional $36 million. Added to their $49.7 million cash position this gives the company about $85 million with no debt.

    Additionally, THLD has an arrangement whereby MerckKGaA will pay 70% of development cost for Threshold's lead drug TH-302. In 2011, THLD spent $24.388 million on research. That amounted to 81% of their total expenses of $30.11 million expenses.

    If the company attributed 50% (probably way low a percentage), of those expenses to TH-302 those cost would be about $12.2 million. Merck KGaA would pick-up about $8.5 million of expense which would reduce total expenses to about $21.61 million per year.

    With expenses of $21.61 million and current cash (excluding any further milestone payments from Merck KGaA) of about $85 million. Threshold should have plenty of cash resources for several years of operations.

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