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 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)
|FXCM (Nasdaq: FXCM )
|OCZ Technology (NYSE: OCZ )
|Skullcandy (Nasdaq: SKUL )
|NQ Mobile (NYSE: NQ )
|LinkedIn (Nasdaq: LNKD )
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?
Take low-ranked LinkedIn, for example. Valued at an eye-popping 699 times earnings, LinkedIn looks richly priced even if it achieves the 65% long-term earnings growth target that Wall Street has set for it. Meanwhile, the company's reputation took a hit recently when it lost some 6 million customer passwords to a Russian hack attack. That's the kind of news that could kill a growth story in a hurry.
Or consider the case of Chinese mobile Internet security company NQ. There's a lot to like about this company on the surface. It's got a fast growth rate for one thing (40% projected), a P/E ratio not too high relative to this growth (35 times earnings), and a big slug of cash in the bank ($130 million). But recent earnings news disappointed, and to make matters worse, NQ announced a secondary offering of shares that drove the stock 11% lower last month.
Two-starred Skullcandy is looking rather worm-eaten as well. Here again we're looking at a pretty reasonable P/E ratio and nice growth. But free cash flow is barely half of reported income, suggesting low quality of earnings.
And of course, three-star-rated OCZ is popping up on the list again -- still growing fast (17.5% projected), and still carrying a low forward P/E (5.4). Problem is, it's still unprofitable on a trailing basis, and still burning cash like crazy. (And in case you're wondering, yes, I'm still betting against it on CAPS.)
The bull case for FXCM
Which brings us to the only stock on this week's list carrying a Fool five-star rating on CAPS: online foreign exchange broker FXCM. This company doesn't get a whole lot of attention on Wall Street or Main Street, but unlike the other companies on this week's list, it deserves a closer look.
As CAPS All-Star srichter3 explains, "foreign exchange is a massive market and is poised for significant growth with the emergence of the non-institutional market. FXCM is the leading platform in this space. Their market share should only grow from here."
Ace CAPS investor BoiseKen agrees: "Forex traders average 3 transactions today," and fellow CAPS member marioj776 expects the "FX volume of transactions to increase." What's more, says BoiseKen: This is a "high margin / high loan leverage business." On average, FXCM grosses nearly $0.79 profit from every revenue dollar it collects.
FXCM: Cheaper than it looks
Granted, a story this good comes at a fairly high price, but not unreasonably so. At 16 times earnings, FXCM appears to sell for a premium to its 11% long-term growth rate. And yet, if you look past GAAP earnings, and examine what's happening on the income statement, you'll see that FXCM is actually generating more than three times as much cash as its reported earnings would suggest.
FXCM is doing good business from the rise of individually controlled foreign exchange trading, one of several growing trends in investing that we discuss in our new free report "The Shocking Can't-Miss Truth About Your Retirement."
The stock itself offers good value for investors. Valued on free cash flow, the $42 million FXCM generated last year translates to a price-to-FCF ratio of just 6.0 -- cheap for an 11% grower. Toss in a modest 1.9% dividend yield, and I think we've found a winner.