Wall Street's Buy List

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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?

Once upon a time, we didn't know what the bankers were up to. Now, thanks to the folks at finviz.com, it's easy to keep tabs on the stocks that financial institutions buy and sell. And the 170,000-plus lay and professional investors on Motley Fool CAPS can lend us further insight into whether these decisions make sense.

Here's the latest edition of Wall Street's Buy List, alongside our investors' opinions of the companies involved.

Companies

Recent Price

CAPS Rating(out of 5)

Arch Coal (NYS: ACI) $14.58****
YM BioSciences (ASE: YMI) $1.86***
Keryx Biopharmaceuticals (NAS: KERX) $3.00***
Flotek Industries (NYS: FTK) $4.67***
CenturyLink (NYS: CTL) $33.12***

Companies are selected based on past-three-month changes in institutional ownership, as reported on finviz.com. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
Up on Wall Street, the professionals think these five stocks are the greatest things since sliced bread. (And by "bread," I mean money.) They've been ...

  • Jumping at the chance to cash in on CenturyLink's mondo 8.8% annual dividend.
  • Hoping the negative momentum at Flotek has created an attractive entry point.
  • Taking more speculative positions as well, betting on the eventual success of perifosine with Keryx, while at the same time hoping for a positive outcome for YMI's recently initiated phase 2 trials of the CYT387 myelofibrosis drug.

Of course, judging from the three-star ratings CAPS members are handing out, many investors are still fence-sitting on these four stocks. Of the five companies I named, the only one that Fools clearly seem to favor is four-star-rated Arch Coal. Let's find out why.

The bull case for Arch Coal
Arch Coal hasn't exactly been a star performer lately. To the contrary, the stock has managed to lose nearly half its market cap over just the past year. Yet true Foolish bargain hunters see a low price tag on the stock as a good thing -- and lately, Arch has been attracting a lot of attention from some of the smartest stock pickers in Fooldom. CAPS All-Star HoldThatWinner, for example, is attracted to the stock's below-book value share price and high dividend yield and writes: "I see growth with ACI in the sector with their recent acquisition of ICO. I think they overpaid for ICO in the short term, but I think with ICO's met coal will grow the bottom line."

Ace investor unicornhunter7 agrees with the growth thesis:

There is huge demand for coal in China and India. A slow economy may hold it back, but we won't be using any substitute within the next 5 years that will be as cheap for them. It even pays a dividend of over 2%.

And awallejr points out: "With the acquisition of International Coal Group, it is now the 5th largest coal producer in the world and 2nd largest producer of metalurgical coal in the U.S."

Yet to my Foolish eye, Arch's share price simply doesn't reflect the opportunities in this stock. Last month, I described Arch Coal as a "$3.9 billion ... market cap" company "selling for less than 8 times annual free cash flow -- not bad for a company growing at 18%." Today, the picture looks even better. Analysts now predict that Arch will grow its profits not at 18% per year over the next five years, but at 28.8%! Meanwhile, free cash flow remains $500 million, still 3 times the amount of GAAP "earnings" Arch reports on its income statement.

Contrast this with the less-free-cash-flow-than-reported earnings tally at Peabody Energy (NYS: BTU) or the actual negative free cash flow at Patriot Coal (NYS: PCX) , and you'll see why I chose Arch over its rivals last month -- and why Wall Street and Main Street are buying the stock today.

Foolish takeaway
If you like Arch Coal at 14 times earnings, you've got to love it at 6 times free cash flow. And whichever metric you prefer to use, if Arch comes anywhere near meeting consensus guidance for profits growth, the stock's an amazing bargain at today's prices.

Or so say I -- but hey, this isn't a dictatorship. This is the Fool. If you have a different opinion of Arch Coal, we have a place to state your case: Motley Fool CAPS.

Want to find out whether Rich is right about Arch Coal?Add the stock to your watchlistand read along as the story plays out.

At the time this article was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 276 out of more than 180,000 members.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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