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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

Of all the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When you're looking to bag a bargain, a panicked sell-off by jittery investors offers 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 contrarian picks, we'll check them against the collective intelligence of Motley Fool CAPS.

Today's contenders include:

Recently Fetching

CAPS Rating (out of 5):

Borders Group (NYSE:BGP)






Fronteer Development (AMEX:FRG)



RH Donnelley (NYSE:RHD)



Aventine Renewable  (NYSE:AVR)



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

Ahem. And so in what may be a first for this column (at least, I don't remember this happening before), we find Main Street in complete agreement with Wall Street this week. Wall Street thinks every stock on today's list deserves to be taken out, lined up, and shot. Main Street wants to cheerlead while they do it. The end.

The end?
OK, maybe not the end. There is one stock on today's list that deserves a few extra words: Borders Group, which last week suggested that it's ready to put itself up for sale.

On Thursday, at the same time that it reported its fourth-quarter 2007 results (essentially flat year-over-year for continuing operations), Borders announced that it has retained Merrill Lynch (NYSE: MER  ) and JPMorgan (NYSE: JPM  ) to advise it on its "strategic alternatives." (Apparently, management fears that potential purchasers are so scarce, it needs to hire two mega-investment banks to be sure of finding a buyer.)

Over here, guys
But perhaps I can help Merrill and JP out. Over on CAPS, we have quite a few interested Borders buyers, among them ...

  • The Fool's own TMFLurch, who argued last November that "CEO Jones' plan to focus on the domestic superstores while paring unprofitable Waldenbooks and selling International stores is beginning to gain traction. Specifically, the ... Q3 2007 ... quarter indicated some important progress with positive comparable stores. However, the continued operating losses, margin pressure and high debt position make this a high risk/high reward opportunity."
  • jpauling352 agreed, reasoning last July: "Just because an industry is having a tough time, doesn't mean the companies are all going bankrupt. In fact, this is usually the best place to find a bargain. The company is undergoing a few changes to make it more competitive. ... [A] more indepth study of its assets would probably show that the intrinsic value is higher than the book value."
  • rhythmaning suggested last April that Borders might even want to buy itself: "With the recent cancellation of the convertible debt offering, it gave us a glimpse that a LBO could also be an option in the making."

As for me, I'm not willing to contradict Wall Street. Borders had managed to burn through more than $280 million in free cash flow through the first three quarters of 2007. We know from its Q4 report the company lost money for the second full year in a row. Since management declined to provide investors a cash flow statement showing how much (if any) free cash flow it generated, I'm going to assume it didn't have any -- for the third year in a row.

With no earnings -- net income or free cash flow -- to hang a valuation on, I have to side with the CAPS, and Wall Street, majorities and suggest you stay beyond the Borders for now. At least until that missing cash flow statement shows up.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Borders Group -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to 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.

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