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.

Wall Street's Wizards of finance are unloading these stocks just as fast as they can hit the sell button, but CAPS members are a more stoic lot. We counsel patience with Humana and Energy Conversion, both currently selling for book value. We see little reason for Reliant and GMX to be selling for mere fractions of their assets.

But the company we love best on this list is Woodward Governor, selling for precisely 1 times book, less than 5.5 times trailing earnings, despite being expected to grow twice as fast over the next five years -- 11% -- and paying investors a sturdy 2.4% dividend yield for their patience. But even that's not the whole story, Guv'ner. CAPS members have a few more arguments in this company's favor. What follows are just three of them.

The bull case for Woodward Governor

• binv271828 makes the most detailed pitch in Woodward's favor, so we'll begin with a few excerpts from this May 2008 argument: "Woodward Governor is a designer, manufacturer and service provider of energy control and optimization solutions for reciprocating engine, aircraft and industrial turbines ... WGOV is slightly different than making a direct play for renewable energy / wind power ... They do component manufacturing and systems integration. For components they makes governors (obviously), synchronizers, power optimization (step up/down transformers), etc. and custom software / firmware for value-added products. ... the same technology that makes wind turbines more efficient also makes gas turbines for electric power plants more efficient as well as aircraft engines."
• Indeed, if you scan its customer list, you'll find most of Woodward's revenues currently come from the aerospace industry -- companies like Boeing (NYSE:BA), General Electric (NYSE:GE), and United Technologies (NYSE:UTX). But BudandMolly thinks: "the sweet spot for growth ... [is] in the electric power generation area." Writing last summer, BudandMolly argued: "the wind turbine arena ... is growing at a strong pace."
• More recently, CAPS All-Star rocksnot agreed that the stock has a: "great valuation, great prospects for all kinds of energy control systems in the changing U.S. and world."

Now, a word of caution, Fools: At 5.5 times earnings and 11% growth, Woodward's valuation does look great -- but this stock is not quite as cheap as it looks. Although Woodward reported nearly $124 million in profit last year, it in fact generated only $85 million in free cash flow. Heavy industry is a capital-intensive business, and spending on property, plant, and equipment eats up a sizeable chunk of this company's cash flow each year.

Still, the fact remains that this stock trades for only seven times its free cash flow -- cash flows that have proven pretty darn rock solid through several quarters' worth of recession already. And even once you factor in the debt and cash into the valuation, the company's enterprise value remains reasonable at 11 times free cash flow.

Time to chime in
Personally, I think the price looks right on this one. A rock-bottom valuation on a company that operates in two businesses enduring hard times -- aerospace and alternative energy -- suggests there's plenty of room for growth once the economy turns back up. Meanwhile, the safe dividend yield assures us a steady stream of income as we wait for this revival. In short, color me optimistic on this one.

That said, the aim of this column isn't just to tell you what I think about Woodward Governor -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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