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?

Luckily for Wall Street watchers, the Internet brings us MSN Money's list of which companies the institutions are buying. True, we should be as skeptical of Wall Street's actions as we are of its words. But when the 165,000-plus lay and professional investors on Motley Fool CAPS agree with Wall Street's opinions, it just might be time for some buying.

Here's the latest edition of Wall Street's Buy List, alongside our investors' opinions of the companies involved:

Companies are selected from the "Institutional Ownership Up Last Month" list published on MSN Money after close of trading on Friday. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

As the Dell (Nasdaq: DELL) vs. Hewlett-Packard (NYSE: HPQ) bidding duel over 3PAR (NYSE: PAR) draws to its last, stratospherically priced and hyperventilated gasp, Wall Street appears fixated on the question: "Who's next?" If Dell cannot have 3PAR, then what company can it buy to help secure its place in the drive to global cloud computing?

Over the weekend, Bloomberg took a turn at trying to answer the question, naming all the usual suspects, save the most obvious -- and the one that Fool investors so clearly prefer -- Akamai. According to the smart money on the Street, a 3PAR-thwarted Dell will most likely aim to acquire either:

• Isilon Systems, "which makes file-storage systems that may be clustered for better performance"
• Compellant Tech, "whose software can route data to different types of drives"
• or CommVault, "maker of data-management software"

Problem is, most of these companies have gotten pretty expensive in the midst of this merger arbitrage frenzy. Take Compellant for example. At 42 times free cash flow and a staggering 226 times reported earnings, the stock looks frightfully expensive. Expensive enough that I simply see no way an acquirer can do anything other than destroy its own shareholder value by buying at today's price.

Isilon doesn't look much better at 68 times free cash flow and ... infinity times its nonexistent earnings. And while it's true that the forgotten-by-Bloomberg Akamai comes a little closer to reasonable valuation, its 33 times free cash flow multiple, and 61 times earnings, tell me there's little value to be had here, either.

Value is relative -- but so is overvaluation
True, when measured against the insane yardstick that is 3PAR's purchase price (572 times free cash flow, and no profits in sight), you can argue that almost anything is a bargain. But while it's clear from the 3PAR fiasco that no one's thinking straight when it comes to valuation in the current climate, I have to believe that at some point, once the auction fever subsides, Dell will come to its senses and buy the company that offers the best value proposition.

Which brings us to CommVault. While at first glance nearly as overpriced as its peers at 60 times earnings, CommVault generates enough cash to bring its price-to-free-cash-flow ratio down to just a 20 times multiple. Considering that 17.5% of the company's market cap is made up of cold, hard cash, and that most analysts expect CommVault to post 20% annual growth over the next five years, this valuation looks right on target to me -- and perhaps even a bit cheap.

Nor am I the only Fool to think there's good reason to own CommVault:

Buyout or no buyout, CAPS member uusernamee has been telling us for more than a year that CommVault's products are "ahead of the curve, and in demand due to businesses needs to meet goverment storage requirments." And NotJesseL has been admiring the company's "Low debt, hi growth, high margin" business, and marveling at the firm's "Hi free cash flow relative to other software companies" for nearly as long. Meanwhile, PRossmango thinks Dell is not the only shark in these waters, suggesting that in due time, "either [NetApp (Nasdaq: NTAP)] or [EMC (NYSE: EMC)]" might try to buy the company.

Time to chime in
So now that you've heard why I think CommVault could be the next domino to fall in the cloud computing wars, and why many Fools agree, it's your turn to tell us what you think. Is the valuation here good enough to make CommVault the default choice for a 3PAR-thwarted Dell? Or are any of the alternatives -- Compellant, Isilon, or Akamai -- better bets despite their higher price tags?

At Fool news, we report what Wall Street's buying, but you decide whether they're Foolish to be doing so.

Click over to Motley Fool CAPS now, and tell me where I'm wrong.