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, their grim outlooks can turn into 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 -- assuming they really are bargains.

Speaking of which, CAPS players believe they've found one such deal in the stock of educational field-trip facilitator Ambassadors Group, a company that we've been watching here at the Fool for more than half a decade. (Friend-of-the-Fool Whitney Tilson highlighted it right here in February 2002.)

Fools who heeded Whitney's advice have been treated to a triple since Ambassadors Group split with Siamese twin and cruise operator Ambassadors International (NASDAQ:AMIE). But does this mean it's too late to buy into the educational travel leader? Hardly. Some of the brightest minds on CAPS think Ambassador Group's best days still lie ahead of it. To find out why, let's review ...

The bull case for Ambassadors International
Motley Fool Pay Dirt analyst TMFPlatoish introduces us to the company:

[The company] runs the People to People programs which provide the travel and logistics infrastructure to various organizations involved with promoting cross cultural exchange programs. The have domestic and international programs for middle and high school age students and many international athletic exchange programs, as well as an array of cultural exchange programs for working professionals.

This is a highly seasonal business. The company makes money in the second and third quarters (April to September) and loses money the other two quarters. On an annual basis they are quite profitable and show returns on invested capital in the 25% range (higher depending on how you count all their cash). They are growing at a 15-25% rate annually and have extremely healthy free cash flow. ... I think they will continue to chug along and outpace the S&P average as they outgrow those larger companies. They pay a nice dividend to boot and are sitting on a $6.00 per share cash hoard [November 2006] that could be used to strategically grow the company through acquisitions.

Gtrinvestor cautions:

this one is going to be hurt in the short-run due to increased energy costs (making travel more expensive), and the slow-down in US growth and decrease in housing prices (making int'l travel even more difficult to afford). ... The importance of international exposure is going to become just too apparent to everyone as time marches on. This company has had an otherwise successful past, but [lost 44% of its market cap on Oct. 23, 2007] due to what they see as a slow-down in 2008.

Ouch! Yet gvelden argues:

The correction in October was overdone. ... Although the outlook for 2008 shows that the company will suffer from the weak dollar and the higher price of oil ... I can't believe that prices charged will not go up as any competition would also suffer from the same problems. ... Despite that the latest numbers were good. ... [The c]ompany's financial strength is good. Solvency is good and almost no debt.

How good is good? Taking a stroll through the financials, here's what we find. Cash in the bank makes up nearly a quarter of Ambassadors Group's market cap. The stock trades for 11 times trailing earnings, and 16 times what analysts predict will be next year's earnings. Either way, it's a more-than-fair price for what most believe will be an 18%-a-year grower over the next five years.

Granted, investors who prefer to value companies based on their cash profits may be less than thrilled with Ambassadors Group. The firm generated less than half as much free cash flow as net income over the past year -- just $12 million. The resulting price-to-free cash flow ratio of 29 looks a mite pricey relative to the growth rate.

But historically, this company has generated free cash flow far greater than its net income. An investor could be richly rewarded for waiting to see if Ambassadors Group returns to form in this respect. And with Ambassadors Group paying you a 2.6% dividend yield for your patience, this could be well worth waiting around for.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Ambassadors Group -- or even what the other CAPS players are saying. We also want to hear your thoughts on this, or any other company on today's list. 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.