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 of the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When you're looking to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to buy 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. Buyers' bid prices to fall in tandem and create the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy" and snatch bargains -- assuming they really are bargains -- from these fearful sellers. 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:

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 from Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

We had no shortage of fear last week, yet greedy investors were as rare as orange groves in Ontario. But man, did they ever burst into bloom yesterday! The Dow, the Nasdaq, and the AMEX all shot up in excess of 11%.

So it seems "greed is good" again -- and just in time for today's column. If you're able to keep the fear at bay for just one more day, and if you're ready to hop a ride on the greed train, the table above gives you one fine place to start your search: EXCO Resources, one of the most loathed stocks on the Street, but one of the most loved stocks among CAPS members.

The bull case for EXCO Resources
One of the great things about CAPS is that with 115,000 investors and counting, we're bound to have a few contributors who can offer firsthand experience with the companies they recommend. That's the case with EXCO, so let's let start off our pitch list with a line from an honest-to-goodness "company man." As CAPS All-Star fogman24 readily admits, he's "both an employee of this company and a stock holder." Writing in August 2006, he says:

XCO grows through [acquisition], something that management uses to great advantage. ... Management holds large stakes, as well as employees combined. [T.] Boone Pickens is the largest shareholder ... 99% of revenue is derived from gas. ... Company plans on continuing to expand into Appalachia.

There are several reasons to invest right off the bat. For one more, we turn to jester112358, who observed back in June that "[n]atural gas is still underpriced relative to oil and this will cause a switch in [usage] pushing up price and thus profit margins."

And carbonates adds:

XCO has 107,000 net acres in the Haynesville Shale. I see the recent decline in price as a buying opportunity for a company that is in the hottest gas shale play in the US. With 1.9 Tcf  in reserves, this is a mid-cap energy stock that I think will benefit from continuing tight energy supplies.

1.9 Tcf?
Right. That's petro-investor shorthand for "1.9 trillion cubic feet of natural gas" -- the amount of proven gas reserves EXCO says it controls. For context, at its current market cap of just below $1.8 billion, that means a purchase of EXCO stock today buys you control over its gas reserves at a cost of about $0.95 per 1,000 cubic feet of gas -- gas that currently trades for around $7 per 1,000 cubic feet on the open market.

Is that a bargain? Let's compare EXCO to a few of its challengers and find out. Megacompetitor Chesapeake Energy (NYSE:CHK) has 10.1 Tcf in gas and another 0.7 Tcf in the form of oil -- 10.8 Tcf equivalent total. At a market cap of $11.7 billion, that works out to $1.08 per 1,000 cubic feet, or about 14% more than an investment in EXCO will cost you.

Further south, Brazil's Petrobras (NYSE:PBR) -- more an oil than a gas play -- claims 15 billion barrels of oil equivalent, which works out to about 90.1 Tcf if converted into gas equivalent. How much will it cost you to own it? About $1.66 per 1,000 cubic foot, or nearly 75% more than the cost of capturing EXCO's reserves.

Granted, both of these comparisons are based on large part on the assumption that all other things remain equal -- but all other things almost never are equal. Still, as a rough exercise in valuation guesstimation, the comparisons suggest that EXCO is at least not overpriced and could well be a bargain -- perhaps a screaming bargain. My conclusion: This one's worth digging into.

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

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