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?
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 180,000-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:
CAPS Rating(out of 5)
|Clearwire (NAS: CLWR)||$2.24||**|
|American Capital (NAS: AGNC)||$29.92||****|
|Zipcar (NAS: ZIP)||$13.50||****|
Up on Wall Street, the professionals think these stocks are the greatest things since sliced bread. (And by "bread," I mean money.) But what can investors expect to get for their money, if they follow Wall Street's lead? Seems to me, each of these stocks carries sizable risks.
Beginning at the bottom, 4G wireless broadband project Clearwire has long been the problem child of the telecom sector. Profitless, debt-laden, and burning bundles of cash, Clearwire's long been dependent on the kindness of Sprint to keep it afloat. So why does Wall Street love it? I can only guess the bankers are hoping for a miracle -- a takeover by Sprint, a last-minute spectrum sale to AT&T or Verizon, or a "squeeze" of the pessimists who've sold 36% of Clearwire's shares short.
Barring such an event, though, sooner or later, Clearwire's clearly a candidate for bankruptcy.
American Capital Agency
Next up, AmCap. So far, this earnings season has seen multiple disappointments in the mortgage REIT sector. Annaly Capital (NYS: NLY) missed consensus earnings last month, and investors are rushing to predict cuts to its dividend payout. Chimera Investment has had to delay filing of its annual 10-K report, citing complications in how it reports earnings under GAAP. And American Capital itself reported a massive decline in earnings, and cut its dividend for "the first time in two and [a] half years."
At 16%, AmCap's dividend yield still looks attractive... but only on the surface. Underneath, we see that AmCap's yield requires it to pay out more money in dividends than it earns as net income, a situation that can't be sustained for long. And time may be running out. AmCap carries a staggering $49.5 billion in debt. Indeed, it depends on cheap debt to fund its dividend. Problem is, TheWall Street Journal reports that China -- whose purchases of U.S. debt have helped to keep interest rates low, and AmCap's profits high -- is now "rapidly" diversifying away from U.S. debt, threatening to raise the cost of debt.
Dollar holdings now make up just 54% of Beijing's foreign currency reserves, their lowest level in a decade. Without support from China, U.S. interest rates seem bound to rise. If they do, bet on American Capital's profits, and dividend, to fall.
Last, we come to Zipcar. Although long a favorite of our own Fool newsletter writers (Motley Fool Hidden Gems and Motley Fool Rule Breakers have both recommended it), Zipcar is not a stock without rust spots. The company generates no free cash flow whatsoever (and never has). Nor is it profitable.
Analysts expect great things from Zipcar, predicting 50% long-term profits growth at the company. However, when I look at the company's income statement, I see a different story. Revenue growth that revved north of 80% between 2007 and 2008 has sputtered since, rising just 24% in 2009, recovering to 42% in 2010, but then slipping a gear and falling back to 30% last year.
Note that not one of these numbers even approaches Wall Street's hoped-for "50%."
Foolish final thought
If all this weren't enough reason to doubt Zipcar's viability, consider the case of Ford (NYS: F) . Zipcar backers made much of the news last year when Ford teamed up with Zipcar to offer 650 cars to the company's customers on college campuses. It sounded like good news, but honestly, I just don't see a future here.
The whole logic behind Zipcar's existence is to encourage people not to buy cars, but share them instead -- reducing overall car ownership in the U.S. This is diametrically opposed to Ford's (and GM's, and Toyota's, and every other automaker's) business model, however. Every time Ford sells a car to Zipcar, it's potentially losing multiple sales that it might otherwise have made to Zipcar's customers. Make no mistake: Ford may use Zipcar as a means to marketing its wares to a few college students, but if shareholders hope to ride a Ford/Zipcar alliance to riches, they'll find they're driving with the parking brake fully engaged.
These three Wall Street stock ideas all look doomed from the get-go. If you're looking for a better way to make money in the market, I'd suggest you invest instead inThe Stocks Only the Smartest Investors Are Buying. Read about them in today'sfree Fool report.
At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 397 out of more than 180,000 members. The Fool has adisclosure policy.The Motley Fool owns shares of Annaly Capital Management, Ford Motor, and Zipcar.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management, General Motors, Zipcar, and Ford Motor.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Ford Motor.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.