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?

At one point in time, the answer was easy: We didn't know what the bankers were up to -- but no longer. Thanks to the folks at finviz.com, it's now easy to keep tabs on what stocks financial institutions are buying and selling. And thanks to the 170,000-plus lay and professional investors on Motley Fool CAPS, we've also got 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 from the "Institutional Ownership Up Last Month" list published on MSN Money after close of trading on Friday. 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're cheering an earnings beat from STEC, while betting KEMET will bounce back from its sell-off  -- and perhaps repeat last year's feat, when it was the No. 7 best-performing stock in the world.

They're also feeling optimistic about biotechs Exact Sciences and AVI BioPharma, lack of profits notwithstanding. The bankers may be gambling that Exact Sciences' recent "encouraging data" on its cancer screening technology will turn things around. Also, AVI's Duchenne muscular dystrophy drug, AVI-4658, is undergoing phase II clinical trials and could have results out later this year.

Most interesting to me, though, is the frenetic buying going on at Excel Maritime. Could it be that Wall Street is coming around to my way of thinking, and realizes that the dry bulk industry won't remain hung up on the reefs forever? If so, that's a popular opinion. For while most stocks making the Buy-list this week garner only two or three stars from our CAPS community, investors are now giving Excel Maritime the Fool five-star treatment. Why is that?

The bull case for Excel Maritime
Unless you've spent the past month deep-sea scuba diving, you've almost certainly heard the warnings Wall Street has been voicing about the dry bulk industry. It started with Morgan Stanley's dire prognosis for DryShips (Nasdaq: DRYS) last month, then quickly spread to infect Genco Shipping (NYSE: GNK), Diana, Eagle Bulk -- the whole dang shippin' match. According to the Street, the dry bulk market is looking "weak ... in the near-to-intermediate term," and there's "more pain ahead" for all of these companies.

But CAPS investors aren't buying it, or at least not in Excel's case. Sure, CAPS member 2win acknowledges that the "Baltic Dry Index is way down." But as CAPS member sniggity explains, "dry bulk stocks have taken a beating due to speculation over excess supply of Capesize vessels. However, EXM derives about 40% of its revenue from long-term profitable contracts with clients, the first of which will not expire until 2013. This will not stop earnings from diminishing, but will insulate the company against the decreased demand for shipping that is materially affecting its competitors."

Meanwhile, member tomfoolme points out that Excel stock costs barely 1.5 times its annual profits, has a "Price/Book" of 0.24, and costs a mere 4.7 times cash flow.

Do as we say, not as we do?
Low numbers all -- and perhaps this helps explain why, at the same time as Wall Street is publicly panning the sector, back behind the curtain they're busy buying up Excel stock. Perhaps.

But that doesn't mean an investment in Excel is without risk. While I certainly understand the attraction of a "1.5 P/E," it does bring to mind the old line that "if something sounds too good to be true, it probably is." And indeed, if you look a little closer at Excel, there is cause for concern. CAPS member sniggity might be right about the company's savvy signing of long-term contracts on some of its boats -- but even that won't prevent Excel from taking a big hit to earnings this year. Most analysts believe we could see profits fall to as little as $0.17 per share in 2011, a 61% drop from 2010 levels.

Time to chime in
Which is to say, Excel's "1.5 P/E ratio" is probably as temporary as it is attractive. Indeed, if you trust the analyst estimates, Excel shares today could easily be costing as much as 30 times this year's earnings (logically, though, growth rate projections would grow in tandem as we near the bottom of the earnings cycle). Net out the interyear rises and falls in earnings, and long-term estimates call for Excel's profits to grow at just 5% per year over the next five years.

Personally, I think 5% growth is a fine price to pay for a "1.5 P/E" stock, assuming Excel can achieve that growth. Just don't be too shocked when next year, the numbers look a whole lot different.

Do you have the guts to ride the topsy-turvy world of cyclical stock investing? Or perhaps you have a better, more consistent growth story you'd like to recommend? If you've got a stock idea to suggest, we've got a place to state your case: Motley Fool CAPS.