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)
|Berkshire Hathaway (NYSE: BRK-A )
|Travelzoo (Nasdaq: TZOO )
|Renren (NYSE: RENN )
|Novavax (Nasdaq: NVAX )
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. Rarely have I seen a clearer case of "which of these things is not like the others" in Wall Street's shopping list than what we're presented with today.
On the one hand, Wall Street's spending a lot of money buying up shares of marginal businesses that range from the unprofitable (Novavax) to the barely profitable (majicJack) to the profitable-today-but-maybe-not-tomorrow (Renren, whose 52 P/E ratio looks pricey even before you notice that most analysts expect it to end 2012 with a loss, and then proceed to lose more money in 2013). Even in the case of Travelzoo, a cheap-seeming P/E ratio of 17 is undermined by low quality of earnings. Free cash flow at the travel deals website backs up less than 60% of claimed GAAP earnings.
And yet, at the same time as institutional investors fritter away their clients' capital on one- and two-starred marginal businesses like these, they're also investing heavily in the bluest of blue chips: Warren Buffett's Berkshire Hathaway, which earns a respectable four-star rating on CAPS. What is it, though, that has so many CAPS investors convinced that Berkshire is "not like the other" stocks on this week's list?
The bull case for Berkshire Hathaway
If you ask CAPS member GreenReign, Berkshire is a lock to beat the market going forward because "it has always outperformed the S&P 500."
And while that's not technically true -- there have been periods in which the S&P outperformed Berkshire -- fellow CAPS member kahunacfa rightly points out that "Berkshire Hathaway's long-term investment record has been stell[a]r." kahunacfa sees the stock's recent "slumping" over concerns about Buffett's health as well as concerns over his successor as offering a buying opportunity because "both issues are being addressed. The shares selling near, or even sometimes less than book value are a STRONG BUY."
Indeed, as CAPS member JohnLeven argues, "Buffett uses Berkshires historical book value growth to measure the companies intrinsic value growth. Despite growing book value at about 19.8% commounded annually over Berkshire's history, it has only grown at a rate of about 10% annually over the past decade. I'm conservatively estimating that it will grow at 7% annually over the next 5-10 years."
Is Berkshire your best buy?
Wall Street believes Berkshire can do even better than this, at least by one measure. Predicting 12% annual earnings growth over the next five years, the Street seems to think Berkshire is a buy at 17 times earnings today. It may be right. Free cash flow at the firm is strong -- $12.7 billion versus just $12 billion in reported earnings.
On the other hand, 17 times earnings would ordinarily be considered a pretty high price to pay for 12% growth, let alone the 7% growth that JohnLeven tells us to expect. A better idea, if you like Berkshire, and approve of the company's foray into railroads -- now Berkshire's third-biggest revenue generator -- might be to consider a rival like CSX Corp. (NYSE: CSX ) . Although CSX comes with a higher price-to-book value (2.7), the company's 13 P/E ratio is right in line with 12.5% long-term projected earnings growth. Plus, CSX offers one thing that Berkshire doesn't -- a dividend -- and a healthy 2.5% dividend at that.
Long story short: In today's topsy-turvy market, a lot of folks take comfort in investing alongside Buffett. The fact that his is one of the stocks recently profiled in our report on The Stocks Only the Smartest Investors Are Buying also argues in Berkshire's favor. But there are still alternatives. To me, CSX looks like a good one.