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 125,000-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.

Uh-oh
This cannot be good, Fools. Reviewing this week's list of companies, I was shocked to see ... well, just exactly what you see yourself right up above: Wall Street's gone gun crazy.

Out of the five companies making this week's list, we find two easily explained by Wall Streeters hoping to profit from mergers & acquisitions arbitrage: Specifically, Agrium's (NYSE:AGU) bid to acquire CF Industries, and IPI's play for Nova Chemicals. No mystery there. Likewise, I expect MF Global earned its spot by virtue of the firm's generous self-tender offer of yester-week. In each case, all we have here is Wall Street professionals trying to get in on a sure thing.

But that still leaves us wondering: What's up with the Pinstripes purchasing pistols?

The bull case for Smith & Wesson
CAPS All-Star tixareforkids answers our question with a question (bad form, but good sense of humor): "Who better to profit from the collapse of civilization as we know it? Also in response to the 'downturn': don't eat out, nail those pesky rabbits/deer/neighborhood dogs who've been ravaging your yard -- them's good eatin'!"

Less tongue-in-cheek -- but from no less respected an investor -- comes this analysis in May from fellow CAPS All-Star synergize: Despite having "near-term challenges ... as it addresses a bloated inventory channel and faces possible continued sales pressure given the declining economy. ... the company's entrance into the hunting and tactical rifle markets, as well as potential for high-value military contracts, improve its long-term prospects."

And as far as the Smith & Wesson-vs.-Sturm, Ruger debate goes, fellow All-Star Imperial1964 has this to say: 

I have to thank the bureau of Alcohol, Tobacco, and Firearms for some good stock ideas lately. ... Most people are underestimating the affect of Democrat-controlled executive and legislative branches on firearm sales. There's a bull market in firearms. If I were playing with real money I think I'd buy [Sturm, Ruger] instead because of its superior balance sheet.

Taking Foolish aim
Now that we know why Fools like Smith & Wesson, let's take a quick look at the numbers and see how they hold up. First, we'll tackle synergize's comments on the inventory issue. I've written about this a few times myself, and I'm happy to report that the concerns that synergize expressed back in May have now been addressed. At last report, Smith & Wesson's inventories were up only 4% year over year, which is close enough to the firm's 2.5% growth in sales that this issue no longer concerns me.

Regarding Imperial1964's preference for Sturm, Ruger over Smith & Wesson ... well, I see where that's coming from. Sturm, Ruger does have the better balance sheet by far, boasting nearly $28 million in net cash, versus Smith & Wesson's nearly $90 million in net debt. That said, from where I sit, Smith & Wesson still offers the fatter target, because it's making greater amounts of cash.

Whereas Sturm, Ruger generated only $1.7 million in free cash flow last year, Smith & Wesson has churned out more than $14.4 million in free cash flow over its last four reported quarters. That gives Smith & Wesson an enterprise value-to-free cash flow ratio of about 17, which compares favorably to the 22% five-year consensus growth rate. (Judged by the same metric, Sturm, Ruger is selling for 79 times its free cash flow. Ouch.)

Time to chime in
Personally, when it comes to things that go "bang!", I prefer the single-digit multiples of free cash flow at major defense contractors like General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT) -- but that's just my opinion. What do you think: Are you more interested in Big Defense, or small arms? And within the latter realm, are you more gung-ho for Smith & Wesson, or Sturm, Ruger?

Click on over to Motley Fool CAPS, and fire back.