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.

Up on Wall Street, the investment bankers are treating biotech like hazardous waste -- which is all the more fascinating given that today's list includes two top performers profiled in last week's edition of "Rocket Stock or Dud?" Both Novavax and BioCryst were at the top of their game then ... but already they are a-tumblin'.

Meanwhile, Fools look at these stocks and recoil in horror -- in all but one instance, that is. Which of these stocks is not like the others, you ask? And I answer:

ISTA Pharmaceuticals
One of the great things about CAPS is that, with 140,000 members and counting, we're bound to hear from a few people with firsthand knowledge of the stocks they rate. So let's start off today's pitch list with a few words from eyedocarun, writing back in the summer of '07: "I'm an eye doc so I have a little insight into the core products offered by ISTA. Their beta-blocker Istalol is just an OK product, but I'm very optimistic about the future of their other product Xibrom ... soon it will be once/day and then the product is in a class by itself. I'm optimistic about their pipeline, especially their upcoming Steroid-Antibiotic combo and dry eye drops. There's a lot of potential for this company and they're on the right track."

So far, so good. Earlier this month, michaeltbryant chimed in to highlight the FDA approval of ISTA's Bepreve drug for itchy eyes. Within days, CAPS All-Star Pennyperson could be heard arguing that we will see "10 to 30% short term gains in the next 6 months [and over] the long haul ... substantial rewards with FDA approval in the pipe lines."

But if Bepreve has already been approved, then what "FDA approval" was Pennyperson talking about? Well, as it turns out, eyedocarun was right about ISTA not being a one-hit wonder in the eyecare space. A few weeks before Bepreve won its approval, ISTA announced that another drug in its pipeline -- the once-daily Xibrom product that eyedocarun promised was in the works -- was producing "positive preliminary phase 3 clinical results."

The advent of these drugs supports analyst predictions of a rapid ramp-up in sales from today's $94 million trailing-12-month level and of profit growing at a 25% annual clip over the next five years. On the other hand, such assertions do tend to gloss over the fact that ISTA is not actually generating any profit at this time -- so it's hard to say precisely what base we're supposed to be growing off of.

And then there's the third hand ...

Third hand?
While it's not part of the standard equipment package, we really do need a third hand with ISTA. You see, there's one other factor operating in its favor today: cash. ISTA's balance sheet isn't the healthiest -- $69 million in debt, versus just $47 million in cash. The good news, though, is that ISTA is no longer burning through its cash at anywhere near the pace it has in the past. In fact, the company is rapidly closing in on free cash flow-breakeven.

Why is this important? Well, if the company continues down its independent path, the prospect of turning free cash flow-positive will reduce the need for ISTA to issue new shares and dilute shareholders in order to fund its operations. Alternatively, if the company's drugs prove so successful as to attract suitors from Big Pharma -- with such megaheavyweights as Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), and Novartis (NYSE:NVS) all operating in ISTA's space -- then the company's improved financial strength should give it leverage to negotiate a higher buyout price.

Whichever path ISTA takes in charting its corporate future, though, the road ahead is looking good.

Time to chime in
Of course, that's just my opinion -- and in all honesty, folks, I'm the furthest thing from a biotech specialist. Certainly there are investors out there with more skills in the sector than I possess. So what do you say, folks? Care to lend us the benefit of your Foolishness?

If you've got insight into ISTA, here's your chance to shine. Click on over to Motley Fool CAPS right now, and tell us what future you see for ISTA.