Contrarian Shopping List

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
-- Warren Buffett

Of all the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When looking to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to snap up stocks on the cheap.

In the short term, professional traders' pessimism can become a self-fulfilling prophecy. Desperate institutions lower their asking prices to get rid of a stock, prompting buyers' bid prices to fall in tandem, creating the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy," snapping up bargains from these fearful sellers. (Assuming they really are bargains.) In today's column, we'll see which stocks Wall Street's motivated sellers are most frantic to unload. Once we've compiled this shopping list of potential contrarian picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders:

Recently Fetching

CAPS Rating(5 max):

CapitalSource  (NYSE:CSE)

$9.43

****

AMR  (NYSE:AMR)

$8.76

*

Northwest Airlines  (NYSE:NWA)

$8.76

*

Delta Air Lines  (NYSE:DAL)

$8.61

*

US Airways  (NYSE:LCC)

$8.57

*

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money on the Saturday following close of trading last week. Recent pricing provided by MSN Money on the same date. CAPS ratings from Motley Fool CAPS.

Which of these things is not like the others? Pretty simple choice we've got this week. Let me count the ways in which CapitalSource differs from the other stocks on the list:

  • It's not selling for $8 and change.
  • It doesn't fly airplanes for a living.
  • And people do not hate it.

That last point, of course, is key. Every other stock on Wall Street's sell list this week gets the CAPS booby prize of our lowest possible rating -- one fallen star. Meanwhile, CapitalSource falls just short of a perfect five stars, and gets the thumbs-up from the dividend-loving Fools at Motley Fool Income Investor to boot. To find out why the average investor loves this stock, you need only look below, as we jump right into ...

The bull case for CapitalSource
I admit it ... I'm a sucker for a clever screen name, so let's start off today's pitches with one from two weeks ago written by All-Star investor evilsquirrel:

great business. no reason not to load up now, especially with an outrageous dividend. even with no appreciation in price the dividend alone will help you beat the market without breaking a sweat.

The Fool's own TMFDocs (also a CAPS All-Star) agrees:

Seems like everything that describes itself as a lender or in real estate is getting creamed these days. From what I've read these guys are managing their cash pretty well and are positioned to take advantage of the buying opportunities the market is offering. Here's hoping. The current 20% yield is pretty sweet too.

Um, did someone say there's a 20% dividend on offer? And more importantly, did anyone think to ask whether that's too good to be true? Actually, yes, someone did. Cicciano sounds the all-clear here, sort of:

Holy mackerel, talk about mercilessly beaten down by association. [Bear Stearns (NYSE: BSC  ) ] this is not. [CapitalSource] has solid mortgage securities with lower default rates and good income ... Best case: management is telling the truth in their outlook and they keep the current dividend level. a 22% yield --insane! The stock would never have to appreciate and we would still crush the S&P! ... A worse case: Even if the dividend is cut by 2/3, that is still a 7% yield to pay you while you wait the stormy ride out ...

Now, if you've been investing very long at all, you know there's two ways a stock can come up with a 20% dividend: (A) Yahoo! Finance is experiencing a data glitch, or (B) the company used to pay a more believable dividend yield, but its stock has been decimated, with the result that the same dollars that used to give you a 10% dividend now translate into a 20% yield.

CapitalSource presents a Type B situation. Like many of the major mortgage investors, CapitalSource has been simply crushed in recent months. Its stock has lost 56% of its value over the last year, including those dividends. On the other hand, fellow financial Citigroup (NYSE: C  ) has also lost 56%, and it yields a much lower 6.1%. Personally, I'm a coward at heart, so a massive dividend yield scares me more than it entices. As a result, I won't be buying anything "financial" until it's far too late to reap the gains.

But perhaps you're a braver Fool than I? If so, tell us why.


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