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

Professional investors are unloading these stocks as fast as they can hit the "sell" button. By and large, CAPS members agree, giving Humana only a lukewarm three-star rating, while marking off three of the five companies outright.

But in one notable case, they disagree with Wall Street: W&T Offshore (which is also, I should point out, a Motley Fool Hidden Gems recommendation.) Who's down with W&T Offshore? These guys:

The bull case for W&T Offshore

• apchempete introduced us to the company last summer as a "small, relatively unknown driller with an absurdly low P/E that stands to grow significantly as gulf drilling increases over the next year or so. Paying dividends now....paying more later. What's not to like". While the question's obviously rhetorical, professional geophysicist and fellow Fool TMFDoodleBugger has a few thoughts on that score. Read 'em here. (Link requires subscription or free trial to Motley Fool Hidden Gems.)
• ikrynyts sees quite a bit to like and argues: "I can confidently say that this is a solid company. Under closer inspection, you will see that this is a family run business with large insider stake in company's future -- a GOOD thing."
• Last but not least, 4thRockFool offers a macro argument in favor of a new bull run for oil: "I do not believe we are returning to an era of lower energy prices. When the world gets back to business, we will need energy, and a conservatively managed and [savvy] drilling company like WTI, with substantial proven reserves of its own, should outperform."

So far, though, W&T Offshore is doing anything but outperforming the market. The stock's down about 85% over the past year. And while the diving price of crude oil partly explains the stock's fall, I can't help but notice that, while larger oil companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP) dig the same stuff out of the ground that W&T Offshore does, none of them have fallen into quite as deep a hole. Which begs the question: Does this just mean we're getting a bigger discount on W&T Offshore shares than the oil majors offer -- or is there something fundamentally "wrong" with the company?

Digging into the financials myself, here's what I see: W&T Offshore carries about a $400 million market cap, alongside nearly $300 million in net debt -- not the best position to be in as we head into a down market for oil, and a recession for everybody else. I suspect, too, that this debt explains why W&T Offshore has been hit so much harder than its bigger brethren. Among the three oil majors I mention above, Conoco has fared the worst to date -- and it's the only one of the three carrying more debt than cash on its balance sheet.

This debt, by the way, is also the reason that I agree with TMFDoodleBugger -- and disagree with the team at Motley Fool Hidden Gems -- about W&T Offshore as an investment. You see, last year, the company generated about $100 million in free cash flow. Not bad for a $400 million stock, but once you add in W&T's Offshore's debt, we're really looking at an enterprise valued at about seven times free cash flow. Relative to consensus analysts' estimates of 6% long-term profit growth, W&T Offshore seems to me at best fairly priced, and at worst, a bit overvalued.

Time to chime in
Of course, to quote Dennis Miller: "That's just my opinion. I could be wrong.'' If you think I am, then here's your chance to point out the error of my ways. Click on over to Motley Fool CAPS and give it your best shot.

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