5 stocks Wall Street is buying
The MSN Money CAPS community helps investors evaluate companies gaining favor among institutional investors.
This post comes from The Motley Fool's Rich Smith.
Actions speak louder than words, as the saying goes. So why do the media pay more attention to what Wall Street says about companies than to what it does with them?
Luckily for Wall Street watchers, we have MSN Money's list of 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 MSN CAPS are in sync with Wall Street's opinions, it just might be time for some buying.
As wisdom-of-the-crowd experiments show, collective estimates are often superior to the estimates of most individuals. The ratings and comments from the CAPS community aren't infallible, but there's value in a system that incorporates the knowledge, information and skills of thousands of participants.
Let's look at a handful of companies that recently made Wall Street's buy list and weigh the sentiment behind the institutional bullishness against the collective judgment of CAPS investors:
Pioneer Drilling (PDC) is a contract driller for oil and natural gas. The San Antonio company operates about 70 land-based rigs, mostly in Texas. The stock has a five-star rating at CAPS.
Crosstex Energy (XTXI) gathers, processes, ships and markets natural gas, which it buys from independent producers along the Gulf Coast. The Dallas company has about 3,300 miles of pipeline and 10 processing plants. At CAPS, the stock has a three-star rating.
Patriot Coal (PCX) produces about 28 million tons of coal a year, roughly 75% of which is used to produce electricity. Much of the rest is used in steel-making. The St. Louis company has 16 mines -- 13 in West Virginia and three in Kentucky. The stock has a five-star rating at CAPS.
Clean Energy Fuels (CLNE) is North America's largest provider of natural gas as a transportation fuel. It supplies natural gas to more than 180 fueling stations, which cater to more than 17,000 vehicles in about 320 fleets. The Seal Beach, Calif., company was founded by billionaire oilman T. Boone Pickens. The stock rates 3 stars at CAPS.
STEC (STEC) has a near-monopoly on a new type of data-storage drive for computers, servers and other devices that use flash memory instead of spinning disks. The Santa Ana, Calif., company's solid-state drives are seen by analysts as one of the few growth areas left in the data-storage business. The stock rates three stars at CAPS.
Energy prices are marching steadily higher as major economies rebound from the recession, the U.S. Energy Information Administration said this week in its monthly outlook.
The agency expects global gross domestic product to grow by 2.5% this year and 3.7% in 2011, sufficient to keep energy prices from reverting to the lows of 2009.
So if the global economy is back on track, that means it's time to start snapping up energy stocks, right? In Wall Street's opinion, at least, that's precisely what it means. Four of the Street's top five recent buys are from the energy sector.
Natural gas prices rose 16% in December, part of a commodity run that, at least to some investors, may be at a near-term peak.
A bullish case for Pioneer Drilling
What is it about Pioneer Drilling that has some CAPS members adding the stock to their portfolios? All-Star investor "RaginSteve" put his finger on one reason. "Nat gas supply excesses are short-term, or illusory," he wrote.
A surge in domestic production as demand was being slammed by the worst recession in decades sent gas prices tumbling to a seven-year low in 2009. Producers ultimately curtailed drilling, so as the economy improves, prices should stabilize and production should ramp up.
It sure looks like a logical progression. We need more gas, or will very soon. Oil, too. And to get at both, we'll need to drill, baby, drill. Enter Pioneer, with its . . . hmm . . . $210 million in net debt, total lack of anything resembling a GAAP profit (or even a prospect for earning one next year). Is this really the right way to play rising demand for hydrocarbons in a reviving economy?
Perhaps. While I admit to skepticism because of the company's debt load and profitless income statement, further examination reveals that things might not be as bad as they appear. For example, the cash-flow statement shows us that even as Pioneer disclaims any "accounting profit" earned over the past year, it generated $56 million in free cash from its business.
Pioneer's success on the free-cash front hasn't gone unnoticed. While the stock only recently showed up on Wall Street's radar screen, more prescient investors have been bidding up Pioneer for quite some time. The stock's appreciation over the past year has more than doubled that of the Standard & Poor's 500 Index ($INX).
Personally, I find the valuation here, at the tail end of that run-up, a bit steep. With an enterprise value of more than $730 million, investors are valuing Pioneer at 13 times the amount of cash it can churn out in a year. That would be OK for a faster grower, but with most analysts predicting Pioneer will grow at only 9% per year for the next half a decade, my feeling is that the stock has gotten a bit ahead of itself -- and that Wall Street is coming late to the party.
But that's just my opinion. You are certainly free to disagree. If you do, please pull up a chair and tell us all about it.
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(This post was updated on Jan. 14)
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The company has made at least 4 acquisitions in the space, and few people have paid any attention.
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