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 Thursday. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
For the second week in a row, Wall Street's waded into Arena to do battle with investor skepticism -- and it seems investors are starting to buy into the story. Since Arena last appeared on this list, CAPS All-Star hatchjcp has thrown his support behind the company arguing that "jusrt like my call on Dendreon at $3 a share, currently close to $40," Arena has "huge upside potential" if its weight-loss drug should receive FDA approval. With Arena shares up more than 50% over the past 12 months, this opinion's getting more popular by the day.

But the enthusiasm isn't limited to Arena. This week, we find "regenerative medicine" pioneer Cytori Therapeutics joining it on Wall Street's Buy List. Like Arena, Cytori shares have gained more than 50% over the past year. Like Arena, it's awaiting FDA approval on products. And like Arena, a faithful few investors predict big things for the company. CAPS member JGGardner, for example, notes that: "The Regenerative Medicine market is expected to grow to $3 billion by 2015. Cytori Therapeutics (CYTX) is the early leader in this market and is now treating, on a daily basis, more patients than any competing stem cell company."

But exciting as the prospects may be in cutting-edge biotech, it's not the only place investors are seeking profits. Wall Street's no less enthusiastic about the decades-old technology of burning dinosaur juice. And some Fools agree. CAPS investor maestro43, for example, argues that Interoil "has tremendous assets and strategic positioning to market them. Within 4 years market cap should be in the neighborhood of 25 Billion." (As opposed to less than $3 billion today.)

And yet...
For all the enthusiasm of the investors quoted above, the consensus on CAPS is that all three of these stocks fall short of the potential of tiny IPG Photonics. What makes this little laser-maker such a hot prospect in Fooldom? Let's shine a light on it and find out.

The bull case for IPG Photonics
TMFPlatoish introduced us to IPG last summer as "the first significant mover in an emerging technology. Fiber lasers have significant advantages over traditional CO2 lasers in certain applications, not the least of which is lower maintenance costs. For now, IPG is the market leader in this field."

And what was true then remains so today. According to CAPS All-Star Geofiz, "[IPG] produces the best fiber lasers in the business, period. This is a play on the continuing drive by customers for efficiency in a difficult operating environment. [IPG's] products allow them to do so at a cost lower than most of the competition."

CAPS member scoobyent  agrees, adding: "fiber laser [is] becoming more important in communications networks." The Chief Technology Officer at JDS Uniphase (Nasdaq: JDSU) was quoted a couple years back asserting that "telecommunications backbones everywhere are based on fiber optics systems." AT&T (NYSE: T) makes use of them in its U-Verse fiber optic service, as does Verizon (NYSE: VZ) with FiOS.

In its earnings report last week, IPG itself confirmed the turnaround in telecom fiber lasers, noting that while Q2 sales for this business were down 24% in comparison to last year, they rebounded 15% sequentially "as customers began reordering."

Combined with simply huge growth in "materials processing" (sales up 34% sequentially), and medical laser sales up nearly as much (29%), this lends support to analyst estimates that IPG will achieve something on the order of 21% annual growth over the next five years.

Valuation
Is that fast enough to justify the stock's 53 trailing P/E ratio, though? Bears may growl "no," but when I look at the stock, I actually see a few reasons to think it bears further consideration. You see, reported earnings under GAAP may come to just $19 million for the past 12 months, but IPG's actual free cash flow has been quite a bit stronger -- amounting to $42 million over the same period.

Now... net out the company's $91 million in cash equivalents and $24 million in debt, and what you're left with here is an enterprise valued at just 22 times free cash flow -- which seems to me not unreasonable given the company's zippy growth rate.

Foolish takeaway
IPG may not be the screamingly cheapest stock on the planet, but neither is it anywhere near as overpriced as its P/E makes it seem. Fact is, if the company keeps on making mayhem of analyst growth estimates (as it's done in three of the past four quarters) and expands free cash flow at a faster clip than expected, it might earn itself that elusive fifth CAPS star -- and deserve a place in your portfolio at last.

Or so say I -- but what do you think? Tell us on Motley Fool CAPS.