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 95,000-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:

Wall Street vs. Main Street
Main Street seems, on balance, less than impressed with Wall Street's top picks this week. It's just OK with two, and two more get solidly panned on CAPS. But there is one company on which Wall & Main intersect: They both love pawnshop operator, check casher, used-car dealer, and CAPS five-star stock First Cash Financial Services. Let's find out why.

The bull case for First Cash Financial Services

• One of the great things about CAPS is that, with 95,000 investors (and growing), we're bound to have some members who can offer firsthand experience of the kinds of companies they describe. troutmane001, for instance, writes: "[Throughout] my Army career, one thing has been prominent in [surrounding] military communities -- Military loan services and check cashing services. These companies have thrived on the military as a whole ... These companies will continue to thrive as long as a Private can get a quick loan to buy that new stereo or rims for his car. As for this company, I have not seen it while driving to and from work, but I am sure it is out there and doing as well as the competition." (By competition, I'm assuming troutmane001 is referring less to pinstriped bankers like Citigroup (NYSE: C), and more to payday lenders like Motley Fool Inside Value pick Advance America (NYSE: AEA).)
• CAPS All-Star dhd1491 liked First Cash's "ev/ebitda of under 5" earlier last month. Yet while calling the stock "cheap," dhd1491 cautions that "the regulatory ax hanging over their head is out of their control for the most part. Hence the market's reticence to assign a higher multiple. This one's a crap shoot ..." Hmm. Hardly a ringing endorsement there.
• Similarly of two minds on First Cash, and for similar reasons, MJKpayday writes: "Although I'll be ever concerned with the cash advance business and its legitimacy and other legal issues I can't argue with the income generated by this out of favor company. ... I need to mention the growth, the great price/book and earnings multiples, the 50% off sale, 52 week low, strong management, and diverse insider buying at levels higher than today's. There's a lot to like and many risks have been considered into the price already."

Now, I have to point out that MJKpayday's numbers are a bit dated now (that last pitch was penned back in January). As I look at First Cash today, though, the basic investment thesis appears to hold: First Cash shares trade for 12 times trailing earnings, yet most analysts expect the stock to grow at nearly 18% annually over the next five years. That sure looks cheap to me. Moreover, it's hard to imagine a stock more perfectly positioned than First Cash to profit from a recession. Pawn shops? Check-cashing? Used cars? This stock's the equity version of a "mudder" in horse racing. It should do best when the economy looks worst.

Problem is, I see a whole lot of "micro" problems clouding up First Cash's macroeconomic good fortune. For instance:

• The analysts posting the optimistic earnings estimates have overestimated First Cash's performance in each of the last two quarters (massively so, in the December quarter).
• While GAAP earnings look good, making the P/E appear low, First Cash was actually free cash flow-negative last year.
• First Cash's "strong management" has evaporated 44% worth of shareholder value over the past year.
• And last but not least: The insider buying looks to me like primarily options exercises, with sales immediately following the exercise. In point of fact, insider ownership is down 2.5% at First Cash over the last six months.

Suffice it to say these facts worry me enough that I won't be hocking any jewelry to buy First Cash shares anytime soon.

Time to chime in
However, the aim of this column isn't just to tell you what I think about First Cash Financial Services, or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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