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:

 

Recent Price

CAPS Rating

(5 max):

Consolidated Water  (Nasdaq: CWCO  )

$16.62

***

Uranium Resources (Nasdaq: URRE  )

$4.17

***

Asta Funding  (Nasdaq: ASFI  )

$8.73

***

DSP Group  (Nasdaq: DSPG  )

$8.79

***

3D Systems  (Nasdaq: TDSC  )

$8.95

**

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 price provided by Yahoo! Finance on the same date.CAPS ratings from Motley Fool CAPS.

A round of applause, folks, for the common man. While Wall Street has been dumping these stocks hand-over-fist, Foolish investors view most with staid equanimity. Of the five stocks making today's list, CAPS players believe only one to be beyond hope (and for good reason). Motley Fool Rule Breakers recommendation Stratasys (Nasdaq: SSYS  ) is eating 3D Systems' lunch. They're willing to give the rest a chance. But which of today's three-star stocks shall we give a chance?

Exercising editorial discretion, I'm going to break the tie and choose Consolidated Water. Like most investors (it appears) I'm not entirely sold on the company's investment thesis, but I do think ConWa has an interesting story. Let's read all about it as we dive into ...

The bull case for Consolidated Water

  • CAPS All-Star nickbaes introduced us to ConWa early last year. "The company uses reverse osmosis technology to produce freshwater from seawater, as well as distributes this water to a range of customers, including public utilities, commercial and tourist properties, residential properties, and government facilities. It also provides management, engineering, and construction services for desalination projects." I'd add that ConWa operates in areas such as the Cayman Islands, Belize, the British Virgin Islands, and the Bahamas, where access to fresh water is limited.
  • Six months later, dayiindaout poured the bull thesis on ConWa into a nutshell: "Desalination-less and less drinkable natural water due to [polluting] and population growth. Looking for this company to expand more into emerging markets."
  • Finally, about a month ago, jabab offered an especially interesting, long-term view on ConWa: "As investors start to look into practical CUBA plays they will see the potential here. When Raul realizes the benefits of opening CUBA up to mega resorts CUBA can be bigger than DUBAI. They will need Fresh Water to keep the tourists from getting sick as they do when they drink water in most Latin American countries. You know the phrase 'Dont drink the water'? You can when you drink [Consolidated] produced/managed water."

You know how GE (NYSE: GE  ) says it brings good things to life? Well, one of those good things is water treatment and processing. Call me crazy, but if one of the world's truly great companies is interested in water, I suspect this is an idea worth looking into.

The Achilles' heel to this investment, I suspect, is its ability to generate decent returns on its capital. So far, it has not. ROIC has yet to see double digits. Capital expenditures in this space are enormous, sucking up most, if not all, of ConWa's cash flow, with the result that it burned all of its cash from operations in both 2005 and 2006. But free cash flow turned positive once again last year, which has me wondering whether those two years were flukes, and whether ConWa will be able to make a go of this business going forward.

That's the thesis that makes ConWa my contrarian pick of the week. Just make sure to wait at least 30 minutes after eating before diving in, and conduct your due diligence to make sure I haven't missed any sharks swimming around this one.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Consolidated Water, or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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

Stratasys is a Rule Breakers selection.

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. 1,502 out of more than 105,000 players. The Fool has a disclosure policy.


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