Wall Street's Buy List

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 financial institutions buy and sell. And the 170,000-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:

Companies

Recent Price

CAPS Rating (out of 5)

Alleghany Corp (NYSE: Y  ) $340.41 *****
Pengrowth Energy (NYSE: PGH  ) $6.24 ****
SandRidge Mississippian Trust II (NYSE: SDR  ) $20.58 ****
Samson Oil & Gas (NYSE: SSN  ) $1.23 ***
Yongye International (Nasdaq: YONG  ) $3.07 **

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 place for your money?

Let's begin at the bottom, with Yongye. A controversial maker of Chinese fertilizer, Yongye shares have bounced off their bottom, yet still trade for the inexplicably low share price of less than two times earnings. For a company whose market cap is less than $60 million greater than the cash it has on hand, this doesn't make much sense ... if the numbers are to be believed. While the company's had -- and continues to have -- issues with cash generation, its current valuation does look enticing.

Certainly more enticing than what we find at Samson Oil & Gas. Here a lack of GAAP profits combines with a record of consistent, and growing, cash-burn to warn investors away.

Hurting Samson's business, of course, is the low cost of natural gas currently, and the declining cost of oil as well -- two factors that weigh similarly on the prospects for SandRidge Mississippian Trust and Pengrowth Energy. As far as investing prospects go, both look more attractive than Samson inasmuch as they pay generous dividends (5.1% for SandRidge, and 7.7% for Pengrowth ... versus zero-point-nothing for Samson). Aside from the dividends, though, well, let's just say that the 27-plus P/E ratios at SandRidge and Pengrowth look a little pricey.

Fortunately, there's one stock on this week's list that offers a better bargain for your money. It's got no truck with the natural gas industry (a plus), but what it does, it does very well indeed. Let's find out a little more about this five-star investment prospect, as we delve into...

The bull case for Alleghany Corp
That's right -- Alleghany. It's not exactly the sexiest stock on the market today, or the biggest household name, but that's OK. According to All-Star investor MJKpayday, "Over the next few decades, Alleghany is set to become one of our nation's most admired, loved, and profitable larger insurance and holding firms..."

Why? sTucKatsPEicheR calls this low-profile property & casualty insurer a "great company being ran by very bright minds."

CAPS All-Star Arnold79 goes so far as to compare it to Warren Buffett's Berkshire Hathaway, and agrees with MJK that "they're stepping up and will become a much, much larger player" in insurance.

A larger and better player. You may find this hard to believe, but right now, Alleghany actually does a better job of making money in underwriting than does Berkshire itself. Berkshire, you see, generally produces a respectable "combined ratio" of between 90% and 100% on its property and casualty payouts (i.e., it pays out less than 100% of the premiums it collects for insurance, booking a profit). Alleghany, in contrast, has worked its combined ratio down into the low 80s twice in the past five years, and once got it down to 72.5%. And it's only paid out more in insurance claims than it took in as premiums twice in the past decade.

That's a pretty nice record, a record I dare say Berkshire's own chairman would envy. Yet at a price-to-book value of just 0.9, Alleghany actually costs less than Buffett's Berkshire on a P/B basis. And with a forward price-to-earnings ratio of 12.7, it's got a P/E that's nearly 25% cheaper than that of Berkshire.

Foolish takeaway
In the investing business, we like to say that some stocks are "cheap for a reason." Stock's like the one we discussed in our recent report on The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail. But this is not the case with Alleghany -- this stock is just plain cheap, and for no good reason. Wall Street's right to be buying it. You should consider it, too.

In fact, I like Alleghany enough that I'm going to climb out on a limb here and publicly recommend it in my own CAPS account. Want to see how the pick works out? (To tell the truth, I'm kind of curious myself). Click here to follow along.

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

The Motley Fool owns shares of Alleghany and SandRidge Mississippian Trust II. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Alleghany.

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 (8)

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 25, 2012, at 9:59 AM, FindTheFool wrote:

    " For a company whose market cap is less than $60 million greater than the cash it has on hand"

    Where is this data coming from?

  • Report this Comment On August 21, 2012, at 3:30 AM, strelna wrote:

    I agree with everything you say. However, I see it has underperformed the S&P over 3 and 5 years although it is much better than the S&P over 10 years. In addition, SPY has a yield of ~ 2%. So recently, you would have been much better off with SPY.

    But then there is the question of risk. Margin of safety tells me Y is better. I would no more buy SPY now than...

    I wonder how things are in the insurance business at present. It is not a sector I really follow, though I know I should (Buffett, Davis etc.).

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