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 140,000-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.

Two-way Street
Jobless recovery? What jobless recovery? Hey, the Dow's still over 10,000, and the Wall Streeters are partying like it's ... 2007. Should you join them?

Investment bankers seem to believe these stocks will surge regardless of the troubles on Main Street -- and they're buying before the bounce. When Fools survey the field, however, we see only one stock with any real elasticity: China Automotive Systems is the name, and auto parts are its game. But can we say its stock has actually "got game"? That's what we're here to find out:

The bull case for China Automotive Systems
In September CAPS All-Star traderpat9 called China Automotive "a buy & hold for 3/5 years. chinas' economy is recovering with a roar & as more people in china benefit from the MONSTER ECONOMY BOOM-this should be a huge money maker for all people who think long term."

Fellow All-Star investor IBDvalueinvestin agrees, arguing that "[a]ll the record Auto sales in China reported over the summer means one thing, CAAS had a monster summer qtr," a hypothesis which gains further support from qvestor's observation that China Automotive "[r]ecently raised its revenue and earnings outlook."

Now, skeptics might say it darn well better have raised its outlook. Because selling for upwards of 33 times trailing earnings, China Automotive is hardly the Hyundai of auto parts makers. To the contrary, this is one very pricey car contributor.

But to my Foolish eye, such skepticism ignores two key factors in China Automotive's favor. First, the growth rate. Only a small handful of Wall Street analysts follow this company, but those who do expect big things out of little China Automotive -- 37.5% annual profit growth over the next five years, to be precise. Second, the free cash flow. China Automotive may sell for 33 times what it reports as "earnings" under GAAP, yes. But if you look under the hood, you'll find this company powered by free cash flow far in excess of those reported earnings.

Over the last 12 months, China Automotive has generated some $18.4 million in free cash flow, nearly 60% above reported earnings. That brings the stock's price-to-free cash flow ratio down to a much more reasonable-sounding 19.5. Paired with the rapid growth rate mentioned above, this makes for a turbocharged valuation, and a stock that's ready to roar.

Time to chime in
Of course, that's just my opinion. I could certainly be wrong – and in fact, have been on companies in this industry. I didn't see Ford's (NYSE:F) turnaround coming. I still think Harley-Davidson (NYSE:HOG) looks overpriced. So if you see a flaw in my argument on China Automotive, don't be shy. Speak up!