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 130,000-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.

Wall Street vs. Main Street
Wall Street is catching these stocks just as fast as catch can, and bully for them -- because down here on Main Street, we think most of these companies are long-term winners. (Sorry, SIGA. Every rule has an exception.) Top of the heap, though, is China's Giant Interactive, an Internet gaming star that competes with rivals both local (Shanda Interactive  (NASDAQ:SNDA) and Sohu.com (NASDAQ:SOHU)) and imported (Activision Blizzard (NASDAQ:ATVI)).

Why do Fools express big love for Giant? Let's find out.

The bull case for Giant Interactive 
CAPS All-Star Tastylunch introduced us to the company early last year, rattling off a series of reasons to own it:

Their top game is china's top game (Zhengtu Online). Zhengtu Online has been described as "chinese Crack" ... Addicts tend to spend all their disposable income on their addiction. Giant Interactive is the sole recipient of said disposable income. ... Giant Interactive makes a lot of money. You can own Giant Interactive shares. You can make a lot of money.

QED? JjcampNR seems to agree. Writing last summer: "They might not make Dance Dance Revolution but they do happen to make the No. 1 online game in China....that's good enough for me." 

Last but not least, as fellow CAPS All-Star MonkeyGG pointed out a few months back: "[Zhengtu Online] is making 3-D version while [Giant Interactive] is going to export their games to Vietnam. Remember, they also have new games coming out."

Good arguments all -- but our CAPS members neglected to provide you one important bit of information: Giant Interactive is cheap.

The company reported more than $163 million in profit last year, meaning that at its current $1.6 billion market cap, the stock trades for almost precisely a 10 P/E. Relative to the 15% long-term earnings growth rate that most analysts predict for the stock, that already offers a very nice margin of safety on your investment -- and could be cheaper still.

Cheap's good ...
But dirt cheap is better. Personally, I cannot say with conviction that Giant Interactive is the latter -- but I do have my suspicions.

You see, Giant has not yet revealed its free cash flow figures for fiscal 2008, but we do know that the company reported a similar level of profitability in 2007. And we know that when it did, its free cash flow exceeded its reported profit under GAAP by about 20%. If what was true in 2007 held true in 2008, then this company could conceivably be trading for an enterprise value-to-free cash flow ratio of as little as 4.0 -- and that, in my view, does indeed qualify as dirt cheap.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Giant Interactive -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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