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 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:

 

Recent Price

CAPS Rating (out of 5):

Anadigics (Nasdaq: ANAD  )

$5.78

*****

Mechel  (NYSE: MTL  )

$18.61

****

Cogo Group (Nasdaq: COGO  )

$4.39

*****

Virtusa Corp (Nasdaq: VRTU  )

$6.94

*****

NVIDIA (Nasdaq: NVDA  )

$11.65

****

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.

So there you have it, folks. Five stocks that Wall Street hates. Five stocks that Main Street loves. The disconnect in perception couldn't be more striking, but the professionals have good reason to fear each of the five: Each of Anadigics, Cogo, Virtusa, and NVIDIA has issued earnings warnings, and while Russia's Mechel seems to be doing fine on the surface, its very existence may be at risk, now that it's turned out to be on Putin's bad side.

With so much uncertainty in the air, investors may find it safest to go with the one stock of the five that bears the official Motley Fool Seal of Approval -- David Gardner's recommendation for Stock Advisor. Here's what CAPS members have to say about NVIDIA.

The bull case for NVIDIA

  • All-Star tely1 gets right to the point: "Best product in the GPU market. [Advanced Micro Devices (NYSE: AMD  ) ] finally made the 4870 to compete with them but it only competes cause of price. I say bet on both, everyone wants their computers graphics to be nice. This will lead to both company making profit."
  • So how much of a threat is AMD? According to Sisyphos, not much: "As a gamer I also know that Nvidia cards are currently technologically the better ones. As such, I presume that ATI will be stretched to get to par technologically with their current profit levels and I see Nvidia to get a sustainable lead in this market." Sisyphos adds: "Nvidia is also working on mobile graphic chips. ... 10 years from now, mobile devices will definitely have extensive graphical elements to them and that market (counted in pieces) is massive (total of over 3 billion mobile phone subscriptions globally, with around 1 billion mobile handsets sold annually)."
  • In the opinion of CAPS All-Star Perkeo, this all adds up to: "a great value/growth opportunity."

Let's run a few numbers and see if that's so. Right now, NVIDIA sells for just 8.4 times its trailing-12-month profits, and 8.5 times trailing free cash flow. Yet once it gets over the hump of reduced short-term earnings guidance, most analysts expect the company to proceed to post five years' worth of 15% earnings growth.

So in a nutshell, what we have here is the leader in graphics chips, selling for a 0.56 PEG based on short-term earnings jitters. Forgive the hyperbole, but that price is just insane. My advice: Take advantage of Mr. Market before he wises up.

(Or not)
Prefer to swim with the tide rather than against it? All voices are welcome at Motley Fool CAPS -- if you think the Street's right on this one, and NVIDIA has further to fall, come on over to CAPS and tell us why.

Fool contributor Rich Smith does not own shares of any company named above. NVIDIA is a Motley Fool Stock Advisor recommendation. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 667 out of more than 110,000 players. The Fool has a disclosure policy.


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