Is Wall Street Wrong About These Stocks?

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Wall Street enthusiasm for the following companies remains tepid, but our Motley Fool CAPS members would disagree. They've bestowed on these companies top honors, signaling their belief that they'll outperform the market.

So who has it right? The professional class of analysts sitting in their paneled offices smoking stogies, or a motley community of investors pooling their best thoughts for others to share? We think we know who'll come out ahead. How about you?

Stock

CAPS Rating(out of 5)

Wall Street Bullish Sentiment

CAPS Bullish Sentiment

ConAgra Foods (NYS: CAG) ****67%90%
L-3 Communications (NYS: LLL) ****58%96%

Source: Motley Fool CAPS.


Now, as much as we love our CAPS community, don't buy these companies just because they've garnered top ratings. And don't sell 'em just because Wall Street says to, either. Investing requires closer diligence on your part, so use these ratings as a launching pad for your own research.

Grow your own
In an odd juxtaposition last year, discount retailers like Wal-Mart reported lower earnings, and cereal makers such as Kellogg (NYS: K) felt a push back against price increases, but luxury-goods makers like Coach and Tiffany notched higher sales and profits. Maybe we just enjoy living like the Kardashians in a world of conspicuous consumption where the rich get richer and the poor get poorer.

But it's one that food companies are going to have to navigate. ConAgra has been trying to juice sales by trying to buy up companies, large and small. Last year it failed in its attempt to take over Ralcorp, the largest maker of private-label goods, as it saw there ought to be a market for discounted food products, but having just spun off Post Holdings, it rejected the offer as too small.

Now ConAgra just acquired a small sausage maker, following similar buyouts of Del Monte Canada in January and National Pretzel in November. The need to continuously add to its portfolio of brands, including Hunt's tomato products, Jiffy Pop popcorn, and Slim Jim beef jerky sticks, amid rising commodity costs has analysts dialing back their earnings expectations.

Revenue has grown at a compounded rate of just over 2% annually for the past five years, but it spiked to 8% in the past 12 months. This suggests the series of acquisitions and divestitures ConAgra's made over the past few years are beginning to pay off. Still, this doesn't seem to be reflected in the stock price, which is up less than 10% over the past year.

Yet it's actually performing as well as or better than some of its rivals. General Mills is up 4% and Kellogg is down 8%. Former acquisition target Ralcorp, however, is up more than 20%, so it seems ConAgra knew what it wanted when it pursued the diversified food maker.

CAPS member 1intheBlackSwamp admits there's the risk of becoming "moldy" from stale growth prospects but otherwise believes it has what it takes to gain ground: "Good dividend -- lots of cash, management skills, products in every home -- they seem to have handled the 'commodity inflation taking profits from food-makers' concern."

Add the consumer-goods specialist to your Watchlist, and tell us on the ConAgra Foods CAPS page whether you think the agribusiness giant will still be able to grow.

Take it to the bank
Last year's budget cuts weighed on the earnings results of defense contractors, as Raytheon (NYS: RTN) , Northrop Grumman, and L-3 Communications all saw sales slip as the year wore down. Yet there were indications that it wasn't a secular situation, as bookings were generally stronger than they had been.

That's becoming more apparent now, as the latest profit reports caught Wall Street flat-footed, undoubtedly still expecting mandatory budget cuts to impede progress. But that's not the way it's playing out, as Lockheed Martin, the biggest U.S. defense contractor, along with Raytheon and L-3 all saw better profits in the first quarter, while the latter even raised its full-year outlook. Only General Dynamics (NYS: GD) saw its profits drop in the quarter.

L-3 has been playing a bit of catch-up, to be sure, finally preparing to shed its SETA unit in recognition of the fact that the rules of the game are changing to ward off potential conflicts of interest in program procurement. Others, like Lockheed and Northrop, previously calved off their SETA divisions.

Even if the playing field is not the same as it once was, the world's governments still need national defense, and L-3 saw funded orders increase to $4.1 billion from $3.4 billion in the year-ago period, as new international business came on board and it won several Defense Department contracts.

Highly rated CAPS All-Star JBouchard recognized the realities of how Wall Street was playing L-3 when he rated the defense contractor to outperform the indexes on CAPS: "Currently depressed because of military spending cuts in the U.S. and elsewhere, but this won't last forever so it seems like a good opportunity to add this while prices are depressed. Existing aircraft will still need to be maintained and upgraded."

Add L-3 to the Fool's free portfolio tracker to see whether it continues to benefit from the belief that a good offense is the best defense.

What's wrong with that?
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At the time this article was published Fool contributorRich Dupreyholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Raytheon, Northrop Grumman, L-3 Communications Holdings, General Dynamics, and Lockheed Martin.Motley Fool newsletter serviceshave recommended buying shares of L-3 Communications Holdings and Coach, creating a diagonal call position in Wal-Mart Stores, and shorting Tiffany. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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