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 115,000-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
Main Street investors scoff at Wall Street's darlings this week. Not a single stock on the list earns an above-average rating; the closest we come is a half-hearted three-star endorsement on Innophos.

That's hardly worth jumping up and down about. Then again, Innophos isn't exactly the kind of company you'd expect to generate excitement. While I'm pleased to observe that the company is a Motley Fool Hidden Gems recommendation, I yawn when I see that its stock in trade includes such super-sexy products as specialty phosphates.

But then again, again, mundane-sounding products like these have generated plenty of excitement for Innophos rivals like PotashCorp (NYSE:POT) and Mosaic (NYSE:MOS). Perhaps this one's worth a closer look despite its lackluster rating? Just in case, let's take a quick look over...

The bull case for Innophos Holdings
NetscribeBasMtrl introduced us to the company early last year: 

Innophos Holdings is a producer of specialty phosphate salts, acids and related products in the United States, Canada and Mexico. ... Innophos sells products in end markets that exhibit steady demand growth through economic cycles. Its customer base comprises consumer goods manufacturers and distributors. ... on 2nd November 2006, company raised an IPO ...

In June, KatWoman50 added: "Phosphates show up in everything from soda to asphalt and Innophos has a near lock on the product. Works closely with it's customers to tailor the product which makes it very expensive for them to change providers."

"Near lock." What makes you say that, Kat? Back in March donalto explained that Innophos is "one of two major suppliers of specialty chemicals (phosphates) to consumer goods manufacturers, distributors, and specialty chemical manufacturers in food, bakery, beverage, pharmaceutical, and cleaning product markets."

Buyer beware
Ah. So it seems we aren't really talking about acids and salts here -- we're talking about investing in an oligopoly. Those can be mighty profitable, and as it turns out, Innophos is doing its level best to prove the usual true, earning a superb 19% operating margin on its sales. Plus, with a P/E sitting south of 11, the stock looks cheap -- with a few caveats.

Caveat No. 1: Although it's a consistent generator of free cash flow, the company is not currently generating as much cash flow as its net earnings suggest. The price-to-free cash flow ratio on this one is 16.

Caveat No. 2: Innophos carries a hefty slug of debt; about $340 million net of cash. However, note that the company was loaded with debt by its parent company when it was spunoff in late 2006.

Caveat No. 3: It's also not growing very fast. According to the quartet of analysts who track it, Innophos is only expected to grow its profits at about 5% per year long-term -- only about half as fast as either Potash or Mosaic.

Time to chime in
So is this "Strike three, you're out," for Innophos? Or are you willing to forgive Innophos its flaws, and trust in the power of oligopoly to produce out-of-the-park profits? Click on over to Motley Fool CAPS and tell us what you think.

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