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 180,000-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:
CAPS Rating (out of 5)
Wall Street vs. Main Street
Up on Wall Street, the professionals think these five stocks are the greatest things since sliced bread. (Perhaps because most of them cost less than a loaf of bread.) They've been...
- Searching for a bottom at Latino Facebook-wannabe Quepasa -- down 66% over the past 12 months and counting...
but ignoring the advice on Lexicon from CAPS member zzlangerhans, who last month warned investors to beware of a vicious cycle of "erosion in share price followed by a reverse split, followed by more dilution" at this Texas biotech.
- Jumping on the bandwagon at Sify Technologies, an Indian ISP with delusions of profitability...
- and betting that closer to home, Ciena will be able to make a profit off the need for more bandwidth as well. (They may be right on that one.)
Of course, judging from the one- and two-star ratings they're handing out on CAPS, few individual investors seem eager to follow Wall Street's lead on these four stocks. On the other hand, they like the top-ranked stock on today's list quite a bit. Should they?
The bull case for Power-One
On the one hand, CAPS member markbudge1 argues that the market for solar power inverters "is growing and so will Power-One. It has a high ROI and ROE and little debt."
CAPS All-Star neilepi rightly points out that Power-One has a "low valuation ... low PE."
And fellow All-Star MaxTheTerrible adds that the company also has "~$1.4/share" in cash on hand. (Actually, it's closer to $1.80.)
And indeed, at a P/E of just 6.1 -- before you even back out the cash in Power-One's bank account -- the stock looks "cheap." My worry, though, is that Power-One just might be cheap for a reason.
Consider: Operating cash flow at Power-One was $48 million in Q4 2011, or $15 million below last year's fourth quarter. Now, management did not disclose a full cash flow statement with its last earnings report (tsk, tsk). But if we assume that capex was roughly equal to what Power-One spent last year, then this would mean the company's trailing-12-months free cash flow was roughly breakeven -- maybe $1 million generated for the year, if we're generous. But what did Power-One claim for net income under GAAP? What's the number that investors rely upon when they calculate that Power-One sells for 6.1 times earnings?
$136 million, that's what. 136 times the amount of free cash flow the company actually (probably) produced. Suffice it to say that with performance like this, I've got serious reservations about the quality of Power-One's earnings.
With $205 million in net cash and a 6.1 P/E, I can see why Wall Street is so enthusiastic about this stock. In fact, there was a time when I believed Power-One was a great candidate for deep value investors, too -- and I recommended it on CAPS for this very reason. On closer review today, however, I've decided to close out my CAPS position in Power-One at a substantial loss.
Don't make the mistake I did. Until Power-One gets its free cash machine turned back on, I think this company's a value trap.
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Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 361 out of more than 180,000 members. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.