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:

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, as of August 14.

Wall Street's traders are unloading these stocks just as fast as they can find buyers, and in a couple cases, Fools agree with them. Poll the 135,000 members (and counting) on Motley Fool CAPS, and you'll find little enthusiasm for THQ or Tyson. In contrast, we find a lot to like about ICU Medical and Shanda Interactive (heck, over at Motley Fool Rule Breakers, we've gone so far as to recommend Shanda.)

But the stock Fools love most of all is Energy Recovery. Let's find out why.

The bull case for Energy Recovery
CAPS All-Star elrap starts us off with a bit of poetry: "'water, water everywhere but ne're a drop to drink' ... and then came [Energy Recovery]. Water is more important than oil. It won't be too long before it becomes more valuable. It is plentiful (in the oceans) but it is useless (for drinking). It appears that [Energy Recovery] has the technology that can make salt water potable & can do it cost effectively."

In April fellow All-Star awhill100 agreed: "Fresh water supplies are dwindling globally. This company has the capability to provide fresh water through desalinization at a cheaper rate than by current means of desalinization. This is a long term buy. Public won't catch on to H2O until the crisis hits."

Meanwhile, nibs61 likes Energy Recovery's staying power: "Some very positve facts about this company. Little debt and ample cash flow. ...100% growth projected on the high end. ... This company is well run and provides these needs for us."

Um, not so fast, nibs61. That may have been true in April, when you wrote the pitch, but Energy Recovery has since reported earnings. Blaming "continued turmoil in the financial sector" for a shortfall in revenue, management now projects the company could earn as little as $0.09 per share this year -- which probably explains Wall Street's losing enthusiasm for the stock.

Now, maybe this just means that "this year's" revenue will just get pushed into 2010, and the profit will still materialize a little later than planned. Certainly, I don't see demand for clean drinking water (ahem) evaporating. To the contrary, the field is replete with big names making big investments in this industry -- General Electric (NYSE:GE), Tyco International (NYSE:TYC), and Mueller Water (NYSE:MWA) are all betting big on future water demand.

Problem is, I'm not at all convinced that Energy Recovery is the best bet here. While it's true that the company boasts a solid balance sheet and strong growth prospects, the stock seems priced for a perfection that it's ill-prepared to deliver (as demonstrated by the earnings warning.) Energy Recovery currently sells for the princely sum of 36 times earnings. Even if you factor in its cash hoard, the company's enterprise value-to-free cash flow still comes in pricy -- 27 times.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Energy Recovery -- or for that matter, even what our CAPS members think. What we really want to know is what you think. Is this water company's future clear, or murky?

And more generally -- are investors right in saying that water is a better investment than oil?

Click on over to Motley Fool CAPS and sound off.