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 145,000 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 traders are snapping up these stocks just as fast as they can hit the buy-button. But with IAMGOLD trading for 97 times earnings, and Human Genome, East West Bancorp, and Hecla so devoid of profit that they have no P/E, Main Street investors are beginning to wonder if the "experts" should just sit on their hands -- except in one instance. Turns out, both Wall Street and Main Street agree that M&F Worldwide is a buy.

Who is M&F Worldwide, and why does everyone love it so? That's what we aim to find out today, as we delve into ...

The bull case for M&F Worldwide 
Who is M&F Worldwide? CAPS All-Star kristm addressed the question last year:

M&F is a taped-together wad of unrelated businesses, but they're all profitable and dominate their respective markets. Check printing business is one of only two significant players in this space ... It throws off mad cash and doesn't require much capital to run. ... Their financial services division isn't much of a factor to the bottom line, and the licorice-producer subsidiary is kinda stupid to tie into everything else, it's small profits need to be sold to some bigger player in the candy space. Also owns Scantron, you should be familiar with them if you've ever taken one of those fill-in-the-dots No. 2 pencil tests. Strongly embedded in the educational market.

So, in summary, M&F Worldwide is a check-printing, bank software-writing, licorice-selling test-grader. As fellow All-Star Ak66 confides: "These conglomeration of unrelated businesses are hard to value and analyests do not like them because they are hard to describe."

And yet, cornpalace reminded us last year that M&F "is generating over 200 mm a year in [free cash flow] and earnings are improving ... The company has a lot of debt, but it has a blended average of around 9%."

And cornpalace is right. Interest payments for the last 12 months ate up less than half of M&F's operating profit, and the company managed to drop $133 million all the way to its bottom line. Free cash flow, meanwhile, surpassed $170 million. As a result, we're looking here at a stock selling for less than five times earnings, and less than four times free cash flow.

But as low as these numbers are, should buy the stock? Evidently, a lot of Fools think you should (and Wall Street is buying.) But me, I disagree.

A complex question, a simple answer
Ak66 tells us that analysts worry about M&F's complexity. But General Electric (NYSE:GE) amalgamated network television with jet engines, while Berkshire Hathaway (NYSE:BRK-A) proposed a strange marriage between auto insurance and chocolate candy -- and both those businesses have managed to survive pretty well.

My objection to M&F, though, isn't that it's too complex -- it's that it's too obviously indebted. Just because M&F makes enough money to pay the interest on its debt doesn't mean that debt doesn't matter. It does. Add the company's net debt to its market cap, and M&F's enterprise value is not five, but 21 times earnings. Similarly, enterprise value is not four, but 16.5 times free cash flow. Were M&F a fast-growing business, these valuations might be justified, but in fact, the sole analyst who follows this stock expects M&F's earnings to decline 11% next year -- and this analyst won't even hazard a guess as to how bad things might look in years farther out.

Foolish takeaway
Nor will I. There's just no need to, when the markets abound in easier-to-understand stocks, with cleaner balance sheets and stronger growth prospects. If Wall Street wants to buy M&F, I say let 'em. As for the rest of us, we're better off spending our time -- and money -- elsewhere.

Of course -- as always -- if you disagree, feel free to tell us why.