"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.
|Dynamics Materials (Nasdaq: BOOM )||$20.83||*****|
|Genco Shipping (NYSE: GNK )||$6.26||****|
|Senomyx (Nasdaq: SNMX )||$5.22||****|
|Schawk (NYSE: SGK )||$15.71||**|
|Geeknet (Nasdaq: GKNT )||$24.64||*|
Companies are selected based on past-three-month changes in institutional ownership, as reported on finviz.com Monday morning. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.
Judging from the star ratings our CAPS members have assigned to these stocks, it seems investors share Wall Street's nervousness about Geeknet and Schawk. (Can you blame them? According to Yahoo! Finance, precisely zero analysts follow each stock, with the result that lay investors have precisely zero guidance on what to expect from the companies' earnings going forward, and no one likes investing in an unknown quantity.)
On the other hand, investors seem happy to rush in where bankers fear to tread, on Genco and Senomyx. Genco sells for a drool-inducingly low 2.3 P/E ratio, so no surprise there. Senomyx is even more interesting; unprofitable under GAAP, the company is generating a ton of free cash flow below the radar. Got to wonder if Wall Street is missing the boat on that one.
The most popular stock on today's list is also a Fool fave: Dynamic Materials, which goes by the ticker "BOOM." Gotta love the name, and five CAPS stars tell us that a lot of Fools love the company,too. But why?
The bull case for Dynamic Materials
As CAPS member AnchorageAK tells us, BOOM is in the business of "metal bonding and fabrication using controlled explosions. [It's a play on] cyclical demand. Managed expenses effectively during economic downturn -- stayed profitable. Well positioned to benefit from overall economic improvement."
Ak66 agrees that "its products are needed for industrial expansion - especially in energy."
WPThatcher thinks the stock's price is cheap and likes its "solid balance sheet."
Wall Street disagrees with this assessment. And while I know I should disagree with them based on the fact that Dynamic Materials is a Motley Fool Hidden Gems recommendation ... I just can't. Not at this price.
Dynamic Materials: Sell the numbers
Just take a look at the numbers, folks, and I think you'll follow my reasoning. First off, BOOM costs nearly 43 times earnings at today's stock price. On the one hand, that's quite a bit more than you'd be asked to pay to own one of its larger, more diversified, and better-funded rivals like Halliburton (NYSE: HAL ) or Schlumberger (NYSE: SLB ) -- either of which can be had for half Dynamic Materials' P/E.
Based on analyst estimates, BOOM stock sells for 18.6 times next year's earnings (and you know what I think about forward estimates). Meanwhile, the most Wall Street thinks we can expect the company to produce over the long term is 13% earnings growth, which is far too little to justify the stock price. And that's the good news.
Time to chime in
The bad news is that if you look closely at the cash flow statement, you'll see that Dynamic Materials isn't even as profitable as its GAAP numbers make it out to be. Fact is, over the past 12 months, BOOM generated a mere $300,000 worth of actual cash profit -- even as it claimed GAAP profits of $6.4 million.
Much as it pains me to say this, I'm afraid Wall Street is right to be selling Dynamic Materials today, and Fools who are buying it are wrong. BOOM may not go bust ... but at today's prices, it's not going to do your portfolio any good at all.