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 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)
|RAIT Financial Trust (NYSE: RAS )
|Frontier Communications (Nasdaq: FTR )
|American International Group (NYSE: AIG )
|MannKind (Nasdaq: MNKD )
|Facebook (Nasdaq: FB )
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?
Let's start at the top of the list, with top-ranked RAIT Financial Trust, recipient of a full five-star rating on CAPS. On the one hand, you can sort of see why Wall Street might be attracted to this one. With a 0.28 price-to-book value, and a P/S ratio that's a mere fraction of what other REITs cost, RAIT sure looks like a bargain. It also pays a tidy 6.8% dividend yield -- enough to attract any investor's notice. On the other hand, though, RAIT currently has no income to support its dividend, zilch for cash flow, and labors under a near $1.5 billion debt burden. In short, it's far from the firmest of financial foundations.
Similar problems afflict Frontier and MannKind. At Frontier, dividend yield is the main attraction -- a whopping 10%. But the company's got an even more serious debt burden than does RAIT, with nearly $8 billion in net debt on its books. Meanwhile, MannKind is just as unprofitable as RAIT, pays no dividend at all, and carries a debt load greater than its own market cap. (MannKind has positives as well as negatives, of course, but on balance, probably more of the latter than the former -- which explains its subpar two-star rating on CAPS).
Facebook... much has been written about this one already, so I won't go into great detail here. Suffice it to say that the business is great, the profits robust, and the free cash flow nearly as strong as the reported profits. But with a P/E ratio of 79, and a price-to-FCF ratio even higher, investors appear fearful that buying a piece of these profits is just too darn expensive. They're right to worry.
The bull case for AIG
By now you may have noticed that I skipped one stock from the above chart -- but only because I wanted to save you the best for last: AIG. Once the premier name in American insurance, AIG became the poster boy for mortgage-related financial mismanagement during the housing crisis.
Fast-forward four years, though, and CAPS All-Star WhichStocksWork tells us that today, AIG is "a very different company than it was pre-crisis. Sold off many divisions to remake itself into a leaner company with much greater focus. Will be one of the better turnaround stories of the whole credit crisis era."
CAPS member dneedle1 points out that it's selling for a "huge discount to book."
And RSue argues that now that the "business has been rescued and restored to health under the astute leadership" of Robert Benmosche, it's "positioned to prosper again."
I agree. Simply put, AIG's price tag has sunk far too low relative to its potential for profit. The stock sells for a meager 0.55 time book value, and a P/E ratio that's truly ridiculous -- just 3.0. Indeed, even if you value the company on its higher 9.8 forward P/E, AIG looks underpriced relative to Wall Street expectations for 20% long-term earnings growth. And given the improvements we're seeing in AIG's combined ratio lately (which dropped from 117 to 109 last year, and hit 102 as recently as last quarter), improved profits do appear to be in the cards.
Foolish final thought
AIG still gets little respect from investors on CAPS, but the smart money on Wall Street is right. Improving operations, lower debt, and a stock price that's even lower than that all add up to make AIG an attractive investment.
Indeed, the situation's even better than that. Like several companies profiled in our recent report "These Stocks Could Skyrocket After the 2012 Presidential Election," AIG is a firm that could benefit from government action in the near future, as the U.S. government liquidates its ownership stake in the company. When you consider the extra incentive that management will soon have to improve operations, AIG looks like a stock primed to take off. Wall Street is right to be buying it.