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:

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. CAPS ratings from Motley Fool CAPS.

 Of hummingbirds and men
I'd say that professional stock traders have the attention span of hummingbirds ... but I wouldn't want to offend ornithologists. If memory serves, just three months ago the top stock on this list -- Nighthawk Radiology -- was topping Wall Street's Buy List.

Here on CAPS, we liked it, too. All-Star xfranco4bcn praised Nighthawk's business model, arguing that the "potential for growth is high as medical services keep growing and being outsourced to specialists." While fellow All-Star LimoDriver1971 posed the rhetorical question: "When was the last time YOUR health insurance costs went down?"

And Wall Street agreed. Yet just three months later, while we still love NightHawk, Wall Street's making like an 8-year-old boy with social problems, whistling as it's plucking feathers off Nighthawk. What has changed?

Opinions ...
Not our investors' opinions, certainly. CAPS member jeffdb still thinks Nighthawk is "the leaders in the radiological field" and predicts that "even if health care is semi-nationalized ... Nighthawk and other companies will be able to adjust their models and make reasonable profits."

Meanwhile, stuinkc gives us a first-person endorsement of the company, confiding: "The physician group at my hospital loves the service they receive from [Nighthawk]. In a growing trend of budget crunches, look for more rural hospitals to outsource radiology for cost savings and even larger facilities with established radiology departments to employ them at night because quite frankly the radiologists dont want to work the night shifts."

... and facts
On the other hand, the facts have changed a bit. NightHawk's latest earnings report showed sales basically flat year over year, with profit down nearly 50%. Operating cash flow took a hit as well, falling by roughly one quarter even as capital expenditures rose. As a result, free cash flow is down at the company -- but down isn't the same thing as disappeared. Over the last 12-month reporting period, NightHawk generated $22.6 million in free cash flow; not too shabby for a $100 million stock. Looks cheap. Still, you should factor in the company's net debt position of almost $50 million, giving an enterprise value-to-free cash ratio of 6.7.

Meanwhile, its recent slowdown notwithstanding, most analysts still expect this company to return to expansion mode and grow its profit at an annualized rate of 10% over the next five years, making this stock a bargain if it comes even close to fulfilling that promise. And now that Congress looks set to settle some of the uncertainty surrounding health-care reform, I expect we'll begin to see NightHawk deliver on that promise.

Time to chime in
Big insurers like UnitedHealth (NYSE:UNH), WellPoint (NYSE:WLP), and Aetna (NYSE:AET) are going to need to find ways to lower costs so as to fulfill their own promises to rein in the growth of insurance premiums. From where I sit, NightHawk occupies the right nest, at the right time, to help with that.

But that's just my opinion. The real purpose of this column is not to tell you what I think about NightHawk Radiology -- or even what the few CAPS members profiled above are saying about it. What we'd really like to do is get a second opinion on this X-ray. So if you've got an opinion on NightHawk, we've got a place to state your case.

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