"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:
|
Stock
|
Recent Price
|
CAPS Rating
(out of 5)
|
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SandRidge Energy (NYSE: SD )
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$9.44
|
*****
|
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SunPower Corporation (Nasdaq: SPWRA )
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$21.06
|
***
|
|
STEC (Nasdaq: STEC )
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$12.53
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***
|
|
Microvision (Nasdaq: MVIS )
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$3.43
|
***
|
|
Pacific Sunwear (Nasdaq: PSUN )
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$3.53
|
**
|
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 pinstripe-and-wingtip crowd can't sell these stocks fast enough. But down here on Main Street, we're a more patient lot. With the notable -- and justifiable -- exception of PacSun, Fools seem inclined to wait and see whether these stocks can pull out of their respective funks.
One stock they're not waiting around for, though, is SandRidge Energy. That one, they're rushing to buy. Let's find out why.
The bull case for SandRidge Energy
Back in September, DaveZzzz3 bravely declared: "Natural Gas has bottomed. [SandRidge] will ride the wave back up as the price climbs back to where it belongs." (So far, Dave's been wrong on both counts ...)
Yet in August CAPS All-Star fringefan called SandRidge a "[w]ell run company that can profit when NG is in the $3.00 range." (Wrong again: Gas is selling for more than $3 today, and SandRidge is still losing money.) More a realist than an optimist, in August MJKpayday conceded that "[n]atural gas is still cheap and may be for so a long time," but nevertheless asserts: "I'm trying to round up several potential nat gas ideas and this is one."
Now, I don't mean to gloat -- far from it, actually. I've actually gotten sucked into the cheap-natgas trap myself, and bought a few shares of United States Natural Gas (NYSE: UNG ) as a proxy for the eventual rebound. So if many Fools have been wrong about natural gas in general, and SandRidge in particular, so far, they've got company -- in me. But will we always look this wrong?
I think not. At last report, SandRidge boasted 1.9 trillion cubic feet of proven natural gas reserves. Incidental to its flagship "gas" business, the firm also has roughly 43.2 million barrels of proven oil reserves -- equivalent to about 259.2 billion cubic feet if converted at the standard industry metric. So call it 2.2 trillion cubic feet-equivalent.
Now traditionally, natural gas is priced in terms not of "cubic feet," but of the BTUs produced by burning these "cubic feet" -- roughly 1030 BTUs per foot cubed -- and right now, the spot price on these BTUs is $3.79 per million BTUs. So the value on these reserves works out to 2.2 trillion cubic feet times 1030, divided by 1 million, times $3.79, which equals $8.6 billion.
Meanwhile, SandRidge itself carries an enterprise value of just $3.8 billion. Compare AtlasQuicksilveritit to a rival like Chesapeake Energy (NYSE: CHK ) , which has 12 trillion cubic feet of gas and equivalent oil reserves, and you'll find a similar disconnect -- Chesapeake's reserves are "worth" $46.8 billion; the company's enterprise value stands at $27.8 billion.
So at the risk of oversimplifying, right now we see Chesapeake Energy valued at roughly 59% of the currently depressed value of its assets. And if you think that's cheap, then SandRidge offers an even better bargain, priced at just 44% of its assets' value.
Foolish takeaway
It doesn't take a rocket scientist to figure out this play, folks. In buying the US Natural Gas ETF, I chose the path of simplicity -- and am paying a 4% premium to net asset value for this privilege. In contrast, investors willing to bet on Chesapeake can nab a 41% discount to the value of its assets, while SandRidge owners enjoy a full 56% discount.
Wall Street may find these stocks frightening. Me -- I think they're just scary cheap.
But hey, feel free to disagree. If you think the natural gas bulls are just full of hot air, click on over to Motley Fool CAPS and tell us why.
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