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're looking to bag a bargain, a panicked sell-off among jittery investors offers you a great chance to grab 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. Buyers' bid prices then fall in tandem and create the very price decline that both sides feared in the first place -- until the selling stops.

Until it does stop, 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:

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 from Yahoo! Finance, as of the same date. CAPS ratings from Motley Fool CAPS.

My, how time flies. Eight months ago -- before Bear Stearns imploded and got itself eaten by JPMorgan Chase (NYSE:JPM), and before the rumors began flying that Lehman Bros. (NYSE:LEH) was not far behind -- I turned the Foolish spotlight on Yucheng Technologies, just as we were beginning to realize the true magnitude of the nation's banking crisis. As bank stocks became verboten, Wall Street was still buying Yucheng shares hand over fist, but today it's playing a game of "hot potato" with the stock.

Now, that's not totally illogical. After all, Yucheng's stock-in-trade is providing software and IT services to banks. But we're talking Chinese banks here. Does that make a difference? Some of the smartest investors on Main Street still think so.

The bull case for Yucheng Technologies
From a macro perspective, CAPS player Xitopie argues:

This 9-year old company has a lot going for it. The Chinese banking system has a long way to go toward modernization at the level of western standards in terms of automated service, channel integration and payment solutions. [Yucheng Technologies] is at the center of this transformation.

CAPS All-Star and Fool staffer TMFJake agrees: "I like the growth potential for a company that is building out a leading Point Of Sales merchant acquiring services platform in China. As [Yucheng Technologies] builds out card adoption and incentive programs, we'll see the increase in POS transactions flow through to the bottom line."

So why is the stock even on today's list? Almost-an-All-Star motleysmart explains that it's part and parcel of the story you see above:

[Last quarter, Yucheng's] net profit was 33% lower than what expected by the analysts. ... What caused the lower than expected profit was that the company decided to spend some of its gross income on ... point-of-sale (POS) machines. POS is seeing explosive growth in China. At this point, it's at a 'land grab' stage. Because of [its] nature of a fixture within a banking-merchant system, once an early player got in, it's difficult for the later comers to get in.

So we seem to have a company thinking long-term and getting punished for it by myopic analysts. You know I like that kind of story. And when it's attached to a stock that's selling for a price-to-earnings ratio of 20, but is expected to grow at 25% per year going forward, this story sounds even better.

Only one caveat I'd add: Although GAAP profits look good here, Yucheng has an exceedingly spotty record of generating free cash flow. In fact, it's generated positive operating cash flow in only one year out of the past four, and it has burned cash at an accelerating rate over the past three years.

Time to chime in
Is that reason enough to avoid the stock? For me, and for now, yes it is. But for you? Click on over to Motley Fool CAPS and tell us what you think.

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