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:

Company	Currently Fetching	CAPS Rating (out of 5)
Emergent BioSolutions (NYSE: EBS)	$4.77	****
Leap Wireless  (Nasdaq: LEAP)	$32.39	**
Ambac Financial  (NYSE: ABK)	$23.65	*
Fannie Mae (NYSE: FNM)	$28.79	*
Freddie Mac (NYSE: FRE)	$24.96	*

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

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.

In through the out door
When it will stop is anybody's guess. But until it does, savvy investors have a chance to "get greedy" and snap up some bargains from these fearful sellers -- if bargains they truly be. Investors aren't seeing a whole lot of bargains this week, but one stock they do like is Emergent BioSolutions, a tiny vaccine maker competing in a world dominated by giants like GlaxoSmithKline (NYSE: GSK) and Novartis (NYSE: NVS).

Emergent's stock lost nearly half its value after reporting a steep earnings decline earlier this month. Yet, as unusual as it is for a micro-cap biotech, the company does (and did) earn a profit from its business manufacturing biological-warfare vaccines for the government. The commercial-vaccine side of the company also holds promise, with an array of products in development for the prevention of everything from strep throat to chlamydia to typhoid, and Emergent predicts that it will achieve double-digit sales growth in the current quarter.

The story sounds good so far. Let's now turn to our CAPS players as they lay out for us ...

The bull case for Emergent BioSolutions

• NorthCarolinaKen says of Emergent: "New outfit, in the DC Beltway, high Federal exposure. Revenue extremely [erratic] quarter to quarter. Large [bioterror] exposure in its vaccines. My main fundamental statistic is Return on Invested Capital and it is terrific at 26%. Valuation on all measures (discounted earnings, cash flow, enterprise value/revenue, enterprise value/[earnings before interest, taxes, depreciation, and amortization], [price-to-earnings-to-growth], [trailing-12-months price-to-earnings ratio]) is cheap."
• CAPS All-Star tenmiles agrees: "At current price of only 15% premium to book, expect Emergent to handily beat the market going forward over the next couple of years. Threat of biological terror is not going away ...."
• And tenmiles' fellow All-Star SapphireSeas gives us a thorough look at the company: "Landed a fat $448M government contract; Have a firm lock on market share in core niche; Positioned well -- geographically and politically -- to take advantage of current [Homeland Security, Defense, and Health and Human Services] requirements for maintenance of the National Stockpile and military vaccinations. ... However strong and appealing this might be, we cannot call it a deep and wide moat. The United States is one year away from watershed National elections. ... I wouldn't go so far as to predict a complete repeal of current requirements to maintain the National Stockpile, which is an important security concern. Likewise, DoD requirements to vaccinate the military are not going to just go away. However, short of another major terrorist attack on U.S. soil -- and with Iraq deployment numbers set to decrease -- any incoming Administration probably won't have the same focus, emphasis, and funding allocated to Homeland Security."

I tend more toward NorthCarolinaKen's strategy of letting "the numbers" guide my investing and paying little attention to political maneuverings. In this case, however, I'll make a short exception -- just long enough to disagree with SapphireSeas' reservations about Emergent. Whatever political party takes over the White House in 2009, I doubt that the new occupant will relish the prospect of being the person whose failure to prepare allowed the U.S. to suffer its first bioterror disaster.

Whether Emergent is the company that benefits from continued Homeland Security spending, or whether it's a rival that wins the largesse, I predict that funding will continue. And at today's low valuation, investing in a single-digit-P/E Emergent BioSolutions looks like a smart bet on that prediction.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Emergent -- or even what the other CAPS players are saying. We also want to hear your thoughts on the company. If you've got an opinion, we've got a place to voice it.

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