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 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:

Company

Recent Price

CAPS Rating

(out of 5)

RAIT Financial Trust (NYSE: RAS  ) $4.73 *****
Frontier Communications (Nasdaq: FTR  ) $4.01 ***
American International Group (NYSE: AIG  ) $31.57 **
MannKind (Nasdaq: MNKD  ) $2.75 **
Facebook (Nasdaq: FB  ) $31.73 *

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.

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. 359 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of American International Group. 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 (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 09, 2012, at 10:57 PM, mediadavis wrote:

    Some quick corrections to the analysis of RAIT Financial Trust.

    First, RAIT currently plenty of income to support its dividend. It may not appear that way if you look at the bottom line "net income" number", but that consolidated earnings number conflates real cash earnings from its profitable property management and commercial property loan operations with non-cash fair value losses from the failing (but non-recourse) Taberna CDO's that it manages (and therefore must consolidate). If you remove the Taberna changes, as "operating income" does, you discover that RAS has been generating a growing amount of cash (far more than it needs to pay the dividend) for six quarters now. If you focus only on cash and ignore non-cash changes completely, you discover that RAS has generated significant cash in every quarter over the last five years (which is why it could continue to pay its preferred dividends when other REITs could not).

    Second, while it's overall "debt" is roughly $1.5B, most ($1.3B) of that debt is tied up in non-recourse securitizations including the Taberna CDO's and RAIT CMBS'. If these securitizations failed, RAS' would be liable for none of the that securitized debt. It's recourse debt load is a much more manageable $196 Million. More important, however, the average interest rate RAS pays on its indebtness is only 1.6% (see page 101 of its 2011 annual report).

    In short, the strong fundamentals that are noted in the article are built on a firm financial foundation.

    For what it's worth, these are easy mistakes to make. You have to look inside the headline income and debt numbers to understand what is really happening. Most traders don't look much beyond headline numbers, which is why RAIT remains a bargain, but informed investors look beyond the headlines, which is probably why RAS rates five stars from the CAPS investor community.

  • Report this Comment On July 11, 2012, at 10:54 AM, WCoastGuynCA wrote:

    In regards to Mannkind, the company will be out of cash in the next quarter. The question now is how will Mannkind raise the $250,000,000 that it will need to operate until its diabetes drug, Afreeza, which is currently in phase three trials, starts generating revenues if it is finally approved after two previous rejections by the F.D.A.

    The earliest that Afreeza could generate revenues would probably be the second/third quarter of 2014.

    Until this question is answered by Mannkind's management I think it's best to stay on the sidelines as I expect a move lower from here.

    It could retest $1.57 before the end of the year.

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