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Fearful Stocks for Greedy Investors

By Rich Smith - Updated Apr 5, 2017 at 7:54PM

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A Fool peers in through Wall Street's out door.

"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:

 

Recent Price

CAPS Rating

(5 max):

American Capital (NASDAQ:ACAS)

$3.24

****

Campbell Soup  (NYSE:CPB)

$27.80

****

Huntsman Corp. (NYSE:HUN)

$3.64

***

MAKO Surgical  (NASDAQ:MAKO)

$7.00

***

Microsemi Corp. (NASDAQ:MSCC)

$12.01

**

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.

Wall Street's hotshots are selling these stocks hand over fist, but only a single stock on the Street's sell list carries a below-average rating on CAPS, while two -- American Capital and Campbell Soup -- actually receive a superior four-star rank. So what is it that Fools know, that the bankers don't?

If you'll pardon me for using a heading that reads like I lifted it from a column on The Wall Street Journal's opinion page, let's examine ...

The bull case for American Capital

  • CAPS member NolAloha keeps the bull argument nice and simple: "Excellent earnings, excellent dividends, excellent ability to pick winning investments, what's not to like?"
  • Well, it may be a little more complex than that. As CAPS All-Star khrushchv explains: "[American Capital] ... is in a tough spot in the current environment. On the one hand, their book value has declined by fairly large amounts ... the dividend has been suspended, and their debt covenants look like they might get triggered. On the other hand, the cash flows on their portfolios look good despite the fact that the market values have become severely impaired (in terms of trading prices), the company is hoarding cash to help stabilize their equity, ... and insiders have been making fairly large open market purchases. This one is a tough call. "
  • Fellow All-Star SoapyHollow agrees: "I still think that [American Capital] will pull through. They have a limited exposure to toxic debt, and their exposure to the China contamination problem, while potentially an issue, is primarily with a company in which they have holdings, rather than they having actual legal liability as a concern. ... It's a gamble stock, but it always has been."

I think I have to agree with our All-Stars on this one: American Capital is both "a tough call" and "a gamble." On the surface, the numbers look just fantastic. The stock is selling for less than 1.5 times what analysts expect it to earn just  next year, to say nothing of the next five, 10, or 20 years.

But it's getting to those five, 10 ... or even one years that worries me. Following khrushchv's lead, let me take a "one hand, other hand" approach to this one. On the one hand, American Capital carries a massive debt load: $4.4 billion with just $320 million cash on hand. On the other hand, its interest coverage ratio seems fine at 3.6, and the firm even generated a whopping $410 million in free cash flow over the past year. Seems to me, the debt load is high but manageable, and so the stock should pull through.

Time to chime in
Then again, if the past year has taught us anything, it's that hubris in the face of "obvious buys" is no virtue, and paranoia in the face of financial firms is no vice. If I had told you two years ago that AIG (NYSE:AIG) would lose 97% of its value in 2008, or forecast that people would be talking seriously of a Citigroup (NYSE:C) bankruptcy, you'd have laughed. Yet this market has proven to be as littered with figurative landmines as a dog park for incontinent canines -- and I'm no longer certain there's any logical limit to how low stocks can go.

Let me invite you to tell us what to do with American Capital. Is it a steal of a deal, or a disaster waiting to happen?

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Rich Smith does not own shares of any company named above. American Capital is a Motley Fool Income Investor pick. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 895 out of more than 125,000 members. The Fool's disclosure policy dreams of organza and orchids.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$53.76 (-0.78%) $0.42
American International Group, Inc. Stock Quote
American International Group, Inc.
AIG
$56.69 (-1.05%) $0.60
MAKO Surgical Corp. Stock Quote
MAKO Surgical Corp.
MAKO.DL
Campbell Soup Company Stock Quote
Campbell Soup Company
CPB
$50.69 (0.00%) $0.00
Huntsman Corporation Stock Quote
Huntsman Corporation
HUN
$30.83 (-0.52%) $0.16
Microsemi Corporation Stock Quote
Microsemi Corporation
MSCC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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