Fearful Stocks for Greedy Investors

"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 picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders include:

 

Recent Price

CAPS Rating

(5 max):

Goldcorp (NYSE: GG  )

$30.38

***

Kinross Gold  (NYSE: KGC  )

$15.41

***

Gold Fields (NYSE: GFI  )

$8.79

***

Vista Gold  (AMEX: VGZ  )

$3.29

***

Fushi Copperweld (Nasdaq: FSIN  )

$10.69

***

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 and CAPS ratings from Motley Fool CAPS.

My, how time flies. It seems like just yesterday that Wall Street's pinstripes were telling us the dollar was doomed; that those who failed to buy gold would be consigned to a pauper's grave. Yet today, with gold prices more than 20% off their recent highs (it's a bargain!), the professionals are "rushing" out of the metal, and selling anything they can find with the word "gold" in its moniker.

Maybe we're optimists, or maybe we're just slow -- but Main Street investors are taking gold's retrenchment with a bit more equanimity. Fact is, all four of the gold plays listed above still enjoy at least some support on CAPS. Personally, though, I'm more intrigued by the other "golden" metal -- and the fifth company on our list, which spins copper into composite wire sold to the telecommunication, utility, and automotive markets. Read on to learn about...

The bull case for Fushi Copperweld

  • angelicaR introduced us to this company earlier this year as: "China's biggest maker of copper clad wires used in a variety of telecommunication, automotive, utility and other industrial products, acquired their former U.S competitor Copperweld Bimetallics LLC in October. Just one month later they announced intent to invest $3.2 million in new machinery for their Copperweld facility in Fayetteville, Tennessee." (Remaining competitors include Encore Wire (Nasdaq: WIRE  ) and Tyco (NYSE: TYC  ) subsidiary AFC Cable.)
  • CAPS All-Star tenmiles likes Fushi's: "High ROE ... [and price of] less than 12x forward earnings," arguing that Fushi provides "very good long term risk-reward for those with multi-year time horizon."
  • fmahnke seconds that emotion, putting the P/E at: "10 with a 20% EPS ... at the low end of guidance. Great Market in China buildout with solid prospects for long-term growth ... should also benefit from recent decrease in copper prices.

So, which is it? Does Fushi have a 12 P/E or a 10? Actually, neither. According to Yahoo! Finance, the company scores a 9 for trailing P/E, with an ultracheap 6x forward earnings multiple. Of course, whichever number you choose to rely upon will look like a mere rounding error if Fushi achieves the 28% long-term growth that analysts project for it.

If that's the way things play out, I have little doubt that we'll have a potential multi-bagger on our hands. But there's one "but" -- and it's a big one: Fushi has no free cash flow whatsoever. Zilch. To the contrary, the company burned cash in every year for the past five, except in 2006, when it generated a bare $300,000 in free cash.

To me, that's a deal-breaker. If Fushi wants to burn cash to smelt copper, it's going to have to find somebody else to finance the operation.

Time to chime in
Braver Fools than I may disagree, of course, and find the projected growth rates here too much to resist. If you're of the mind that growth trumps cash, well, OK. I'll listen to that argument: convince me.

Tyco International is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

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. 394 out of more than 115,000 players. The Fool has a disclosure policy.


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  • Report this Comment On August 19, 2008, at 11:31 PM, 153fish wrote:

    <and it's a big one: Fushi has no free cash flow whatsoever. >

    FSIN had $34 million of revenue in 05. It is expected to have revenue of $328 million in 09. To evaluate this company that is in an early rapid growth stage, on the basis of generating free cash flow, is not something that i feel is useful or relevent to its' ultimate long term intrinsic value.

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