Wall Street's Buy List

If actions speak louder than words, 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 120,000-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 on the Saturday following close of trading last week. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Main Street investors look at this week's list of Wall Street's favorite stocks and shrug. CAPS members aren't willing to give more than a middling three-star rating to most of them. The sole exception is a company that just a couple of years ago would have been a no-brainer, yet today merits a barely-above-average four stars: self-proclaimed "supermarket to the world" Archer-Daniels-Midland.

Why do Fools give this one the thumbs-up when the rest of Wall Street's faves fall flat? And why does ADM fall short of a top-of-the-line five-star rating? Let's find out.

The bull case for Archer-Daniels-Midland

• A week after the presidential election, CAPS All-Star randnew has just two words for ADM: "Obama, ethanol."
  
• You gotta give randnew points for brevity, but we'll turn to tonymagoo for a bit more on the theme: "ADM is the largest ethanol producer in America. Our new administration appears to be in favor of many kinds of energy which will improve ethanol's impact on ADM's earnings."
  
• But as much as our CAPS members admire ADM as an ethanol play, thievaryx explains:

  ADM is a critical player in the ethanol market, but that doesn't mean the ethanol market is critical for ADM. ... Refining and packaging of biofuels represented 8.5B in revenue out of 69.8B for 2008 ... Moreover, these activities contributed 181 million in operating profit versus 3,441 million for 2008. In sum, yes ethanol is an important part of ADM, but ADM is more important to ethanol than ethanol is to ADM. ... The two most important segments for ADM (both in terms of revenue and operating profit) are Oilseed crushing/origination ... and merchandising/handling (storage of grains and subsequently identifying best value added channel and delivering... Those two activites described above contributed 70% of the revenues for 2008.

So basically, ADM is a play on the trend of people eating food -- with an ethanol aperitif. Even if you doubt the ethanol thesis, it's hard to argue that the first trend doesn't have legs. And with ADM selling for a measly seven times trailing earnings, the stock looks like cheap eats.

But why, oh why, does ADM's stock still lack that fifth and final star? Perhaps it's because, relative to rivals Bunge (NYSE:BG) and ConAgra (NYSE:CAG), which sell for P/Es of 4 and 6 respectively, even a 7 P/E looks pricey. Or, focusing on ADM alone, it might be because the company lacks significant free cash flow to back up its GAAP "profits." You see, while net earnings for the past 12 months total more than $2.4 billion, the company has generated barely $780 million in actual free cash flow. (And this has been true for some time; ADM hasn't generated free cash flow in excess of net earnings since 2005.)

Foolish takeaway
Personally, the gap between accounting profits and free cash flow seems sufficiently sizable that I won't be investing in ADM anytime soon. But perhaps you're willing to let it slide? If you see things differently, tell us why in CAPS.

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