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 135,000-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:


Recent Price

CAPS Rating

(out of 5):

Interactive Intelligence (NASDAQ:ININ)



Ivanhoe Mines  (NYSE:IVN)



Medifast (NYSE:MED)






Stein Mart



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
As Main Street investors peruse Wall Street's buy list this week, you can see heads shaking in dismay: Three companies (two of them unprofitable) separately hawking diet plans (Medifast), armchairs (La-Z-Boy), and clothing (Stein Mart) to cash-strapped consumers in a recession? (Medifast is the profitable one.) The fourth company (Ivanhoe) a profitless, practically revenue-less gold miner?

What are the bankers thinking, buying this stuff?

In fact, the only company on Wall Street's shopping list that CAPS members do approve of is Interactive Intelligence. Let's find out why.

The bull case for Interactive Intelligence

  • CAPS All-Star PrincetonAl introduced us to Interactive Intelligence last June as a "small cap technology stock" whose "interesting, highly rated VOIP / call center technology ... aligns well with trends long-term."
  • Fellow All-Star investor shikikami has personal experience with the company's products, and in February agreed with PrincetonAl: "We ran this phone system, its on the right path but they need to mature, make the products more stable and flexible. I see a lot of potential if they do it right."
  • And according to our third All-Star booster, gallunltd, the company has a sound base undergirding that potential, namely: "zero debt, positive level of ownership, good margins, and plenty of cash."

Sound good so far? Well, let's put these assertions to the test.

The first thing I notice about Interactive Intelligence is that it's certainly priced as if it has potential -- 69 times trailing earnings is anything but cheap. And it's true (as CAPS member gallunltd noted) that this company has a lot of things going for it, including:

  • About 33% insider ownership.
  • Better operating profit margins than either 3Com (NASDAQ:COMS) or Alcatel-Lucent (NYSE:ALU), (but worse than Cisco (NASDAQ:CSCO)).
  • No debt and nearly $50 million in cash and short-term investments.
  • A proven ability to create more cash. Over the last four quarters, Interactive Intelligence generated $9.2 million in free cash flow -- more than twice its reported net income.

But ultimately, it's the valuation that keeps me from recommending the stock. It's not just the price-to-earnings ratio, either. No matter how I look at this company, it seems too high-priced for my taste. Net out the firm's copious cash, for example, and the enterprise value-to-free cash flow ratio still comes to nearly 26, which is just too high even for the 17.5% annualized five-year growth that analysts believe Interactive Intelligence will turn in.

Time to chime in
Long story short, as much as I'd love to agree with my CAPS peers -- and with the team over at Motley Fool Rule Breakers, which has recommended Interactive Intelligence to subscribers -- I just cannot. Not at this price. Not when there are so many other bona fide bargains to choose from.

Then again, the purpose of this column isn't just to tell you what I think about the company, or even what other CAPS members have already written about it. What we really want to know is what you think about Interactive Intelligence.

If you've got an opinion, we've got a place to state your case. Motley Fool CAPS.

Interactive Intelligence is a Motley Fool Rule Breakers recommendation. Click here to get 30 days of free access to the service to find out why the analysts want this stock in their portfolio.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 648 out of more than 135,000 members. The Fool has a disclosure policy.