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, rather than 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 180,000-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:
(out of 5)
|Cirrus Logic (Nasdaq: CRUS )
|Bank of Ireland (NYSE: IRE )
|FuelCell Energy (Nasdaq: FCEL )
|Oncothyreon Inc (Nasdaq: ONTY )
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.
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?
Judging by the mediocre two- and three-star ratings that Foolish CAPS members are handing out to most of these stocks, it seems a lot of investors have their doubts -- not that I blame them. Take Oncothyreon, for example. This cancer researcher has no profits. It has no revenue, for that matter. And while it has plenty of cash in the bank, at the rate it's burning the stuff ($23.5 million a year), it doesn't seem likely that Onco will be able to get its new PX-866 small-molecule drug to market without at least one more big round of dilutive capital-raising. Whether that happens will depend on its success navigating non-small-cell lung cancer vaccine Stimuvax successfully through phase-3 trials, FDA approval, and market adoption.
Or consider the case of FuelCell Energy. The company's pact with Korean steelmaker Posco (NYSE: PKX ) has been winning over some skeptics on Fool.com lately, and with $126 million in annual revenue, FuelCell's clearly a more substantial company than Oncothyreon at this stage. On the other hand, it's burning cash just as fast -- $28 million over the past year, although it has a smaller bank account to work with (just $19 million, net of debt).
And Bank of Ireland? Seriously? Sure, it made a profit last year, and that has some Fools feeling optimistic. But this banker's still levered to the hilt, with twice as much debt as it has cash. It makes cash-rich bankers like our own Citigroup and JPMorgan look downright safe by comparison.
When you come right down to it, there's really only one company on this list that Fools believe stands a chance of outperforming the market over the next few years. (And as we'll see in a moment, even this one has some issues.) But first, let's let the bulls have their say.
The bull case for Cirrus Logic
Most investors supporting Cirrus seem to focus on one factor as particularly important, and CAPS member kenney69 comes right out and says it: "Cirrus is a successful supplier" for a very successful product: the iPhone.
jdwelch62 calls Cirrus "one of Cupertino's favorite suppliers. As long as that relationship holds up, and iPhones and iPads continue to sell like hotcakes, CRUS is going to get pulled along for the ride."
And from at least one perspective, it has been a very profitable ride so far. Indeed, CAPS member JonBarleycorn cites "Good EPS & Rev. growth" as primary factors for why he likes the stock.
Presumably, EPS and revenue growth are what attract Wall Street to the stock, too. However, their words of praise are not gospel.
To see what I mean, one need only take a close look at Cirrus' cash flow statement and see what other investors may have seen when Cirrus filed its 10-K with the SEC on Wednesday: $47.3 million in fiscal 2011 free cash flow, a number that is barely half the net income Cirrus claimed in its April earnings release -- which most definitely did not include a cash flow statement. That $47.3 million, incidentally, was also down about 29% from what Cirrus produced last year -- an unfortunate result of Cirrus' flat-or-falling operating cash flow and rising capital-investment costs.
On the surface, I admit that Cirrus looks somewhat attractive. The company sells for 20 times trailing earnings and sports a 20% annual growth rate, judging from Wall Street estimates. But valued on the actual cash profit it's producing, the company's price-to-free-cash-flow ratio of 35 seems far too expensive for a 20% grower, even if that grower is "one of Cupertino's favorite suppliers."
Long story short: While it's true many Fools still support Cirrus, I am not one of them. The stock looks expensive to me, and until it gets the cash flowing again, I cannot recommend it. Luckily, Cirrus isn't the only component supplier capitalizing on "The Next Trillion Dollar Revolution" in mobile. In one of our latest reports, we've uncovered a less pricey opportunity in the mobile sphere, a company looking to parlay its leadership in the PC market toward mobile devices. Click here to read this report today and learn more about the incredible opportunity on the horizon for this business and its investors.