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 that 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 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.

Wall Street vs. Main Street
Up on Wall Street, the professionals think these five stocks are the greatest things since sliced bread. (And by "bread," I mean money.) They've been ...

• ... betting there's more to Callon Petroleum's $8.6 million in net profits than meets the eye (and with operating cash flow approaching $58 million, I bet they're right) ...
• ... hoping continued strength in Exelixis' stock (up 158% in 52 weeks) will squeeze the shorts and keep the rally running ...
• ... placing similar bets on General Moly (but riskier bets, I think, considering this company has yet to book its first dollar of revenue) ...
• ... all while taking a more conservative approach at Atlas Pipeline, currently priced at under four-times earnings.

Perhaps Wall Street's most conservative-seeming call of all, though, is its continued interest in shares of FirstEnergy. I mean, all five of these stocks are viewed as safe, solid, four-star bets by CAPS investors. But could anything be safer than a stable electric utility like FirstEnergy?

As a matter, of fact, I think the answer's "yes" and would argue FirstEnergy is anything but a safe bet. But let's allow the bulls to have their say ... before I tell you why they're wrong.

The bull case for FirstEnergy
CAPS member JoyRide144 introduced us to FirstEnergy last year as a "huge electric utility" that has "acquired another big utility with coal reserves to boot. Service area includes diverse areas so sales will be stable. Nuclear and coal provide firm costs of power produced and improving grid will allow better distribution of firm cost power at higher prices to end users over many years."

More recently, forrestn20 called FirstEnergy "a tremendous value pick" with a 4.9% dividend that "doesn't hurt."

Indeed, not only does shinybill like the firm for its "attractive dividend yield," but also argues it's "a growing electric utility."

Dividends: Great until ... not so great
But that's just the problem: FirstEnergy isn't growing. And that's key to why I think its dividend isn't attractive. You see, according to the analysts that follow it, FirstEnergy has already posted 3% annual earnings declines over the past five years. It's pegged for further declines at the rate of about 1% per year over the next five years.

Yet even this wouldn't totally kill the bull thesis, except for two things. First, many investors seem to like this stock because of its generous dividend yield. And yes, at 4.9%, FirstEnergy pays its shareholders more than rivals American Electric Power (NYSE: AEP) or Dominion Resources (NYSE: D) do. Problem is, those two firms pay out just 69% and 35% of net income, respectively, in the form of dividends. FirstEnergy, in contrast, is already maxed out at a 102% payout ratio.

Now if FirstEnergy is already maxed out on the dividends it can pay, what do you think will happen if earnings continue to fall? That's not a trick question. It really is as simple as this: When earnings fall, dividends must ultimately fall as well. (FirstEnergy carries more than $18 billion in net debt and cannot sustain the dividend with cash on hand.) When that happens, as I think it must happen, it's logical to assume that support for the stock will decline as well.

Time to chime in
When you combine all this with the fact that at 20 times earnings, FirstEnergy already costs more than American Electric Power (which costs 15 times earnings) and Dominion (nine times earnings), I honestly don't see much hope for the stock. Whatever you think about the other companies this week's "buy list," it seems to me the Street's best on FirstEnergy, at least, is sure to short-circuit.

Of course, that's just my opinion. If you've got a different take on the stock, feel free to set me straight. Click over to Motley Fool CAPS, and tell me why I'm wrong.