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 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, their grim outlook can become a self-fulfilling prophecy -- at least in the short term. The more desperate institutions become 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.

Mortgage madness
When it will stop is anybody's guess. But until it does, savvy investors have a chance to "get greedy," and snap up bargains from these fearful sellers (if bargains they truly be). This week, we find investors continuing to flee the minefield that is the subprime mortgage market and the homebuilders that benefited from it. Beazer, Novastar, Accredited Home -- they're all up there, and they've all been tagged with the CAPS booby prize of a single, solitary star.

Surprisingly, though, one firm that you'd think would get caught in the carnage, American Standard, still gets an above-average four-star rating on CAPS. As you probably know, American Standard makes kitchen and bath fixtures (at least until it sells that business to Bain Capital) and air conditioners through its Trane unit, which will remain after the spinoff. American Standard also will spin off its vehicle control systems business. Why does this housing-parts maker get a pass when everyone else touching on the industry is selling off? Let's see whether our CAPS players can provide the answer:

The bull case for American Standard

• nickbaes lays out the situation for us: "Trane is gonna be a trane stock. Dominant player in a wonderful area. $6b in annual sales. They are dumping the toilet and sink division (for cash) -- likely north of 1.5 billion. They are then spinning off the car related breaking unit division -- and this is running around 2.5b sales per year. I expect to get another 5-10% return from simple breakup."
  
• FOOLBEFREE agrees that: "ASD breakup will create more value. Also, when US housing recovers, ASD will rise more."
  
• Bringing up the rear, CAPS All-Star toddbeau reminds us that American Standard has: "Good analyst ratings, low P/E, PEG, dividend, good price target."

Personally, I'm not too sure about that assessment. For one thing, I don't place a lot of faith in analysts' ratings or their price targets. And as for the P/E (price-earnings ratio) and PEG (price-earnings to growth ratio), it's hard to know how much faith to put in those metrics when the company to which they refer is about to get split in three.

That said, it's probably instructive that while the company as a whole sells for 12 times trailing earnings, and is estimated to be growing at 12% per year, the PEG ratio does look at least fair. Moreover, the Trane unit is the most valuable of American Standard's companies, generating 60% of sales but 77% of operating profits. Similarly, the WABCO vehicle-controls division, which will be spun off -- and thus owned separately by anyone who buys American Standard today -- generates 18% of sales and 25% of profits.

Logically, therefore, if you get rid of kitchen & bath, which is losing money, the remaining units will have lower P/Es than the whole of American Standard. So yes, I can see why our CAPS players deem American Standard a buy.

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 other CAPS players are saying. We want to hear what you know about the company. Is there something to this story we're missing? Is it logical to think that of the three American Standard units up for sale, Bain Capital decided to buy only kitchen & bath because it's the weakest link -- or is it more likely Bain thinks this unit has the most value-creation potential? Tell us what you think. 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. 248 out of more than 60,000 players. The Fool's disclosure policy sets the standard.