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Contrarian Shopping List

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
-- Warren Buffett

Out of the quadrillions of quotations quarried from that most loquacious of quotationists, this one holds a special place in the hearts of Foolish investors. Are you looking to "buy low" so as to later "sell high"? If so, your best chance of getting that initial, low entry price comes when panicked sellers are unloading their shares at whatever price is on offer.

In today's column, we search the ranks of Wall Street's motivated sellers, and note which stocks they're most frantic to unload. Therein may lie the makings of a contrarian investor's shopping list. But don't just take my word for it. Before you decide to go in through Wall Street's out door, check your thinking against the collective intelligence of Motley Fool CAPS investors.

Today's contenders:

Recent Price


Hardinge Inc. (NASDAQ:HDNG)






Riverbed Technology (NASDAQ:RVBD)



Echelon Corp.  (NASDAQ:ELON)









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 pricing provided by MSN Money on the same date. CAPS ratings from Motley Fool CAPS.

The problem with pessimism
On Friday, 234 listings on the NYSE hit their 52-week lows. That's nearly one stock in a dozen trading on the Big Board. It's depressing news, and when professional traders get pessimistic, their grim outlook can become a self-fulfilling prophecy -- at least in the short term. The more institutions become desperate to abandon a stock, the lower the price they'll accept to get rid of it. And as their "ask" prices drop, the "bid" prices of buyers will fall in tandem, creating the very price decline they feared in the first place.

Until the selling stops.

In through the out door
When this autumnal stock squall will end is anybody's guess. But until it does, savvy investors have a chance to get greedy, and snap up bargains from fearful sellers. One stock that our CAPS players think offers a particularly compelling buy thesis is machine tooler Hardinge, a maker of computer-controlled metal-cutting lathes, machining centers, grinding machines, collets, chucks, indexing fixtures, and other industrial products.

Exciting stuff, huh? Well, our panel of unofficial experts seems to think so. Nearly 200 investors have looked at the stock so far, and only a bare half-dozen failed to like it. Let's find out why the rest of them think Harding is due for a bounce.

The bull case for Hardinge 

  • CAPS All-Star tenmiles decided to give Hardinge the thumbs-up just last week, citing a "Market sell-off in Hardinge [that] creates attractive long term value proposition for this maker of computer controlled machines. I own their competitor HURC in the real world which offers a stronger balance sheet, but this one works for CAPS at 10% below book value."
  • What caused the sell-off? Fellow-All Star M2R2H informs us that the stock was "punished by Wall Street for not meeting expectations even though they had a 35% increase in [sequential] profit."
  • But perhaps the most informative comment comes from a neighbor. All-Star CAPS player amckane confides: "This company is headquartered near my home village in upstate NY. It is moving much of its business overseas where desperately poor people will work for a fraction of what the locals will work for here. This is also where the business is, as manufacturing facilities are increasingly located in places like China, and, well, China ... did I mention China?"

Yes, you did, amckane -- and thanks very much. So basically, what we have here is a U.S.-owned and operated manufacturer that's not only taking full advantage of the global trend toward outsourcing, but also putting itself "in the face" of potential buyers of its products. Sounds like smart business to me.

And the fact that Hardinge operates in the same sphere of business that's been so kind to Hurco (Nasdaq: HURC  ) -- a Motley Fool Hidden Gems "watch list" stock that's gained more than 50% in the last 12 months -- sounds pretty good, too. Tie all this up with the bow of a single-digit P/E, plus 30% projected annual profits growth, and Hardinge looks too good to be true.

So what's the catch?
You know, they say that every investment has at least one thing wrong with it -- and that's true of Hardinge. In this case, the catch is that despite "earning" more than $21 million over the last 12 months, as earnings are calculated under GAAP, the firm generated no free cash flow whatsoever. In fact, it incurred a cash loss of about $0.1 million.

Meaning that while the bull case for Hardinge is pretty obvious, the picture is actually a little fuzzy. So pull out your magnifying glass and give this one a look-see, Fools. When you're done, drop by Motley Fool CAPS and tell us what you think.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2007, at 6:24 PM, jwarne01 wrote:

    Very timely article Rich. It was specifically the lack of cash generation, order deceleration, lower margins and most importantly, lower value-add product / defensible products which had us steering clear of HDNG. HOWEVER, on the other hand, we've been accumulating HURCO over the past two years because of it's ability to accelerate cash generation, improve margins to the highest in industry, continue to accelerate order growth and release new, higher value-add products. HURC announces the first week of Dec.

  • Report this Comment On November 20, 2007, at 6:29 PM, jwarne01 wrote:

    With Hurc's order base accelerating with recently released new value-added products we expect the growth to continue @ 24-28%. This organic growth combined with 68% of world-wide sales in Euros, wherein the Euro is up another 12% since Q4'06, we expect orders, revenue

  • Report this Comment On November 20, 2007, at 6:31 PM, jwarne01 wrote:

    and EPS to continue to exceed expectations. This has been a consistent theme for 36 mos. and we expect forward EPS of $4.10 in '08 -- thus, current multiple @ 9X with growth beyond 20% top

  • Report this Comment On November 20, 2007, at 6:33 PM, jwarne01 wrote:

    and bottom-line. We've used these dips to accumulate over past 30 mos. Great, efficient Co. brought to our attention by Motley Fool!

  • Report this Comment On November 20, 2007, at 11:23 PM, TMFDitty wrote:

    Well, now I just gotta ask: Who is the "we" in that "us steering clear of HDNG"?


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