Wall Street's Buy List

"Actions speak louder than words." There's more than a grain of truth to that old chestnut, I'll warrant. But why does the media focus so much attention on what Wall Street says about companies? After all, upgrades and downgrades are mere words, but what really matters is how the big boys behave.

Luckily for Wall Street watchers, the Internet has made it easy to find this out, too. All we need do is read MSN Money's list of which companies the institutions are buying. Of course, "Monkey see, monkey do" may not be the soundest of investment strategies. Even as we view the professionals' words with skepticism, we might want to think twice before blindly imitating their actions.

And yet, there are times when Wall Street is buying, and the smartest investors on Main Street agree. At Motley Fool CAPS, we track the opinions of 65,000-plus lay and professional analysts, then overweight the most successful raters' opinions, arriving at a "CAPS rating" of from one to five stars (five being the best). When opinions on Wall Street and Main Street intersect, that just might be the time to do some buying.

Here then is the latest version of Wall Street's Wish List, with a summary of how CAPS investors view the companies:

Wall Street vs. Main Street
Main Street generally agrees with Wall Street this week, giving more thumbs-ups than -downs to the gurus' favorite stocks. Personally, I think the most intriguing company here is BIDZ.com, which appears to be making a play to become the next Blue Nile (NASDAQ:NILE). But I'll bow to the popular will, and choose instead from one of the top three: Universal Insurance, Sequenom, and Cytomedix.

Actually, this choice is easy. Although it hails from the disreputable AMEX, Universal Insurance gets a lot of respect in CAPS-land, and a whopping 162 ratings from our players. More importantly, 71 of those ratings are from All-Star investors -- and all but one are positive. Let's see why they agree with Wall Street that this insurer deserves a premium rating.

The bull case for Universal Insurance
manucastle starts us off with a few numbers:

Price = 6.94
EPS = 1.01
Gross profit margin = na Industry 45.2
ROA = 8.5 Industry 4.1
ROE = 137.2 Industry 14.8
PE = 6.7 Industry 9.3
Insider ownership = 61.6...
Metrics from qtr ending 06/30/2007.

Fellow All-Star knudfool adds:

Cash is greater than market value. Free cash flow with a high dividend. I'm in.

To sum up, TheStillMan says Universal Insurance is a:

... very efficient insurance company selling at a huge discount to recent earnings. Margins are excellent and ROE is nothing short of outstanding. Low institutional ownership and a hefty sustainable dividend.

At this point I should confess: I don't know a lot about investing in insurance companies. The only one I own (Montpelier Re (NYSE:MRH)), I bought essentially on the say-so of not one, but two separately produced Motley Fool newsletters: Motley Fool Hidden Gems and Motley Fool Stock Advisor. (I'm up 12% in three months. Thanks for asking.) So I'm really not qualified to tell you whether Universal Insurance is as good as it seems on the surface.

What I can tell you is that I see several reasons to be suspicious of this stock, its near-universal endorsement among CAPS All-Stars notwithstanding. First, while the stock has a superb combined ratio of 73, and while that number has been dropping for the past couple of years, Universal usually achieves combined ratios well in excess of the breakeven level of 100. (Montpelier Re, in contrast, has only broken 100 once in the past five years.)

Second, although Universal Insurance has incredible cash flow for its size ... it has incredible cash flow for its size. Its price-to-free cash flow ratio of 2 is just too good to be true. Its free cash flow quintupled in scale between 2005 and 2006, suggesting that the firm may be writing a lot of policies and raking in a lot of premiums, but perhaps without much concern for what will happen when the next hurricane hits and it comes time to pay up.

Third and finally, insiders are selling out. Not at a frightening clip, perhaps, but they're definitely net sellers.

Time to chime in
Of course, the aim of this column isn't to tell you what I think about Universal Insurance. There are far wiser Fools whom you should listen to first. In fact, perhaps you're the one who should be telling us about the company. If you've got an opinion, we've got a place to voice it.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.