Contrarian Shopping List

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

Out of the quadrillions of quotations quarried from that most loquacious of quotationists, this one holds a special place in the hearts of Foolish investors. Are you looking to "buy low" so as to later "sell high?" If so, your best chance of getting that initial, low entry price comes when panicked sellers are unloading their shares at whatever price is on offer.

In today's column, we search the ranks of Wall Street's motivated sellers, and note which stocks they're most frantic to unload. Therein may lie the makings of a contrarian investor's shopping list. But don't just take my word for it. Before you decide to go in through Wall Street's out door, check your thinking against the collective intelligence of Motley Fool CAPS investors.

Today's contenders include:

The problem with pessimism
The problem with going against the grain on Wall Street is that when professional traders get pessimistic (as you might say they did last week), their grim outlook can become a self-fulfilling prophecy -- at least in the short term. The more that institutions become desperate to abandon a stock, the lower the price they'll accept to get rid of it. And as their "ask" prices drop, the "bid" prices of buyers will fall in tandem, creating the very price decline that they feared in the first place.

Until the selling stops.

In through the out door
When this latest market downdraft will stop is anybody's guess. But until it does, savvy investors have a chance to get greedy and snap up some bargains from fearful sellers (if bargains they truly be). Problem is, investors aren't at all certain that "bargains be" anymore. Investors give below-average marks to most of the companies on today's list, and above-average to just one: Advanced Energy Industries.

Advanced Energy, which manufactures conversion and control systems, has seen its stock price plunge 27% since reporting earnings in the last week of July. In that report, Advanced Energy confirmed that a 2% drop in quarterly revenues took a 36% toll on its profits as R&D spending, plus a higher tax rate, ate into the bottom line. Yet at the same time, Advanced Energy promised a profit in Q3, as contrasted with last year's Q3 loss.

Is Wall Street focusing too much on the past, and not spending enough time considering the future for this firm? Let's see what CAPS investors have to say on the subject.

The bull case for Advanced Energy Industries
The raw numbers certainly look propitious. Out of 107 players who have rated the company, 102 call it an outperformer. More importantly, each and every one of the 19 All-Star CAPS players sits in the bull camp. Here's why:

• NechesInvst sees "very little debt on the books." Sales "have continued to grow and the company turned profitable in 2005. Currently, growth in sales and earnings are up about 14% year-over-year."

• cobradon likes the firm's low P/E ratio, and cites Richard Moroney, editor of the Dow Theory Forecasts newsletter, who advocates investing in the company: "Reflecting leading market positions and a fairly diverse product offering, Advanced Energy has posted higher sales in seven of the past 10 years."

• But the very best bull pitch on this stock doesn't come from an All-Star at all. JASCruz calls Advanced Energy undervalued based on discounted cash flow analysis, through which he values the stock at "over $30." JASCruz also likes the firm's "pre-tax profit margin over 18%," "return on invested capital of 23%," cash-heavy balance sheet, and insider ownership in excess of 20%.

Now mind you, JASCruz wrote this pitch in early July, before the earnings report that sparked the sell-off at Advanced Energy. So to confirm his numbers are still accurate, I checked with the Fool's data provider, Capital IQ, to see how the report changed Advanced Energy's stats. As it turns out, return on invested capital stands at 13% (return on equity, however, is 24%), operating margins are 17%, cash is abundant, and insiders are holding onto their shares.

But this story gets even better. Digging into Advanced Energy's cash flow statement, I find the firm generated $84 million in free cash flow over the last 12 months -- and is priced at an ultra-cheap 9 times that free cash flow. For a company expected to grow its earnings at 21% over the next five years, that's a bargain.

Time to chime in
But the aim of this column isn't just to tell you what I think about Wall Street's rejects -- or even what our other players are saying. We also want to hear what you know about the company. Are Wall Street's wizards missing an obvious "growth-at-a-reasonable-price" story here, or is there something we're missing? If you've got an opinion, we've got a place to voice it.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 230 out of more than 60,000 rated players. The Fool has a disclosure policy.