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 and CAPS ratings from Motley Fool CAPS.

Wall Street's traders have fallen out of love with these five stocks, and are selling them hand over fist. Down here on Main Street, though, they're finding few buyers. Fact is, if you ask the 135,000 members (and counting) on Motley Fool CAPS, only two of these stocks are worth owning.

And of those two, they prefer CapitalSource by far. Here's why:

The bull case for CapitalSource
Last April, CAPS All-Star Babachrono called CapitalSource: "A good company beat up because of its association with banks and the financial sector. Has a great health care section that comprises 1/3 of the business."

slb0971 agreed just a couple of days later: "General panic in financial sector, as well as fears about commercial real estate/leasing (especially with exposure in California) has this baby suffering. However, strong management is capable of navigating through these troubled waters. ... Definitely underpriced, with huge upside potential."

More recently, tobyg74 chimed in last week. While admitting that CapitalSource has just come off a "tough quarter," tobyg74 thinks the "long term looks real good though with paydown of debt and more money in the bank."

A tough quarter ... yes, it was that. A series of one-time charges had CapitalSource reporting a $247 million loss on Thursday. And the debt hasn't so much been "paid down" as restructured -- this REIT-now-turned-bank issued debt and used it to reduce its bank loan obligations and extend the terms for their repayment. The goal, as noted by CEO John Delaney, was to "extend the duration of our liabilities to better match the duration of parent company assets."

On the other hand the "panic" about distraught financial firms does seem to have subsided -- at least, if the doubling of Goldman Sachs' (NYSE:GS) stock price off its March low, the triple at Citigroup (NYSE:C), and the clean quintuple at Bank of America (NYSE:BAC) are any indication. Does this mean it's now safe to get back in CapitalSource, or conversely, that all the gains have already been made?

Time to chime in
I do not know. Seriously -- I don't. Banks and high finance just aren't my thing. You see, Warren Buffett tells us that an investor should never invest outside his "circle of competence." For Buffett, that means he can buy just about anything, so long as it isn't tech.

But for me, well, I know a thing or two about defense contractors, and I've got a passing familiarity with a few other industries, but I couldn't pick a winning bank stock if my portfolio depended on it. So I don't try.

And that, dear reader, is why you are here. Somewhere out there, someone certainly knows more about banking stocks in general, and CapitalSource in particular, than I do. So help a Fool out, will you? Click on over to Motley Fool CAPS now, and tell us what to do with this stock. Do we follow Wall Street's lead and sell it? Do we buy on the dips?

You make the call.