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 -- and whether you should buy 'em:

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money after close of trading on Friday. Recent price and CAPS ratings from Motley Fool CAPS.

Which of these things is not like the others?
STEC, Brocade, H&R Block, and Palm issued disappointing guidance last week, and investors are heading for the exits at each. But what's the deal with EnergySolutions?

In contrast to everyone else on the list, good ol' ES just kept rolling along last week, issuing a fourth-quarter earnings report chock-full of improved revenues, lower costs, and a simply astounding leap in profitability -- from $0.03 per share in Q4 2008 to $0.25 (!) per share in Q4 2009. Yet despite last week's good news, Wall Street's been busily selling off the stock. Why?

The bull case for EnergySolutions
What's behind the panicked selling at EnergySolutions? CAPS member mikejakecci gives us a clue: "The stock is oversold based on management turnover at the top 2 positions." And yes, by all accounts, chairman and CEO Steve Creamer's retirement announcement a couple of weeks ago came as quite a shock. Yet mikejakecci believes "the new team [headed by former company president Val Christensen] can continue and the stock price will rebound nicely."

After all, while the management may have changed, the business remains the same. As sett0047 told us back in June, EnergySolutions runs: 

... the largest commercial radioactive waste disposal facility in North America and largest pure-play in nuclear energy services. Maintenace and service contracts covering 80% of active nuclear reactors in North America (provides a base level of recurring business) [and] $19.7B in DOE contract opportunities (10yr realization).

And for those who agree that nuclear energy is the way to go, but believe that uranium miners and fuel providers like BHP Billiton (NYSE: BHP) and Denison Mines (NYSE: DNN) offer the most investment potential, surfinchemist poses the following (rhetorical) question: "In 1849 would you have rather owned several mines or a pick and shovel company? Auxiliary services are the way to go in the alternative energy 'gold rush'.''

Now admittedly, this nuclear "pick" didn't do such a great job of excavating cash last year. While reported profits came to $51 million at the company, actual free cash flow totaled just more than half that sum -- just $27.8 million -- and barely one-third of the $76.5 million in free cash flow EnergySolutions produced in 2008. When paired with the management shake-up, I suspect these numbers may help to explain Wall Street's lack of enthusiasm about the stock. But here, Fools, is where I also suspect we see the true bull thesis for ES: Historically, this company has proven itself to be a much better operator than you might think from focusing on just last year's numbers.

Over the five-year period running from 2004 through 2008, ES averaged $110 million in annual free cash flow, while reporting just $61 million on average in annual earnings. If new management can just return ES to its historical pattern of cash generation, we could soon be looking at a stock priced at less than five times free cash flow -- staking a bright green-and-glowing "buy" sign over this nuclear power play.

Time to chime in
Of course, for that to happen, EnergySolutions' new management team will have to prove it can execute as well as its departing management. Will they pull it off? Is new CEO Val Christensen up to the task? Click over to Motley Fool CAPS now, and you tell us.

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