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. (But read here to see why Fool Jim Mueller says today that he's really tired of that quote.) 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 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.

Up on Wall Street the traders are selling these stocks hand over fist -- and if you ask most investors, they're right to do so. Out of the five stocks making today's not-hot list, four get below-average ratings from CAPS members.

And the exception? That's where we find ...

The bull case for American Reprographics 
Is bigger better? American Reprographics investors sure hope so, because as stockfreak1 points out, the company is the "[l]argest company in its sector." Indicative of its industry-leading status, the company has a contract to do in-house printing for Boeing (NYSE:BA). And yet, the company's bread-and-butter business remains the preparation of specialized copies of plans and specs for large-scale construction projects.

Now, ask any Toll Brothers (NYSE:TOL) or Pulte Homes (NYSE:PHM) investor what he or she thinks of the state of the construction industry these days, and you can guess how well that's working out for American Reprographics. Regardless, stockfreak1 likes the fact that as the company endures tough economic times, its "CEO took a 50% pay cut," and is sharing the pain.

Back in March, CAPS member ogradybs commended the company for its "solid financial condition ... strong cash flow, and a substantial ownership stake for management. It is also a leader in a fragmented industry and is making acquisitions."

CAPS All-Star nonzerosum likes American Reprographics as well, and in March predicted the company will easily generate $60 million in free cash flow, "despite the awful environment ... Based on that, the stock is worth more than $10." But nonzerosum thinks the stock may be worth even more, placing a bet on "disciplined management and the upside potential when recovery comes, and/or stimulus $$ start flowing."

And I have to tell you, Fools, that I'm glad somebody is optimistic about this recovery coming -- because American Reprographics isn't. Last week, management warned that this year's earnings will drop precipitously, sending shares tumbling 21% in a matter of minutes. Management now says 2009 earnings will come in at around $0.30 per share -- or about 50% short of previous expectations.

Needless to say, times are tough in the repographics industry. But could lean times foreshadow some fat profit for investors brave enough to buy the company now? I think they do.

Consider that in the teeth of the worst recession any of us has ever seen, American Reprographics still generated $113 million in trailing free cash flow over the past 12 months. While that number is trending down (first-half results show just $52 million in free cash), it's still mighty big for a stock valued at just $323 million.

Foolish takeaway
If nonzerosum is right and this recession does ever end, and if American Reprographics grows its profit at the near-17% annual clip that most analysts project for it, then this is an awfully attractive valuation we're getting on the stock right now. Conservatively speaking, it looks to me like an enterprise value of less than six times free cash for a 16%-plus grower.

Granted, two big "ifs" do not a sure thing make, but with a margin of safety this big, I see plenty of reason to get greedy over American Reprographics -- and precious little reason to be fearful.

(Disagree? Feel free. If you've got a bearish counterargument on the company, you can post it on Motley Fool CAPS right now.)