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 of the Oracle of Omaha's orations, this one holds a special place in Foolish investors' hearts. When you want to bag a bargain, a panicked sell-off by jittery investors offers you a great chance to buy 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, and when buyers' bid prices fall in tandem, we get the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can get greedy and snap 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:

Of those five, CAPS players rate just one as above average. Turning up their collective nose at Motley Fool Global Gains pick MF Global, they're chasing dividends this week. And truth be told, few companies offer a more impressive yield than MCG Capital does.

The company is at turns described as a private-equity shop similar to Blackstone (NYSE: BX), a business development company like American Capital Strategies (Nasdaq: ACAS), and a "commercial finance company." But whatever you call it, the business remains the same: MCG uses its own funds to finance companies looking for private investment, takes equity and debt stakes in stable, small-cap companies, and profits both from interest on loans and from appreciation in the value of its equity investments.

In turn, investors hope to profit primarily from reaping the benefits of the company's generous dividend payments. According to Yahoo! Finance, the forward dividend yield on MCG shares is a rich 24% per year.

Bull trap?
Sounds pretty good so far, right? I think so, too, but beware -- the experience of past investors suggests that in chasing dividend yield on this one, you just might step into a "bull trap". Consider a few of the pro-MCG pitches we've collected on CAPS over the past year or so:

• In December 2006, Jackallica asked, "With a dividend over 8%, what's not to like?"
• Five months later, in May 2007, FootNote got sucked in by the stock's "10% div."
• Add a couple of months, and we find Larry2U commenting, "With a 11% yield, you've got to love this one!"
• Fast-forward four more, and the appropriately named luvdividends calls MCG a "Great dividend play @ 13%."
• And to close out our history lesson, just two weeks ago, TexasStud fell for MCG's "juicy 20% Dividend."

Now, all of this would be well and good if the dividend yield kept rising because MCG was raising the absolute size of the dividend. But in fact, MCG's quarterly dividend has held steady at $0.44 per share. Remember: Dividend "yield" equals the dividend amount divided by the price of the stock. The yield is growing because the stock price itself has fallen steadily -- down 64% over the past 12 months.

Is that a situation that will reverse soon, and should you therefore buy while MCG's yield is plump? Wall Street thinks you shouldn't. CAPS players think you should. For my part, I'm going to have to side with the Street. The simple fact that the company is now paying out 122% of its earnings on dividends, in this environment, suggests to me that a dividend cut may be in the offing. If so, the comments from our Foolish CAPS players suggest that a big reason a lot of people want to own the stock will evaporate -- and that could cause the stock to fall further.

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