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 you're 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 -- and whether you should buy 'em:

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money after close of trading on Friday. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Up on Wall Street, the pinstripe-and-wingtip crowd can't sell these stocks fast enough. Down here on Main Street, we take a more discerning approach. While CAPS members aren't too hot on the prospects at NutriSystem, Medivation, or Palm, they still think Shanda's got game, and SandRidge Energy is a gas, gas, gas.

Choosing which of these four-star rated stocks to profile today would ordinarily be a problem for me. Fortunately, though, Shanda is already an official recommendation of Motley Fool Rule Breakers. If you want to know more about that one, signing up for a free trial will give you access to everything you ever wanted to know. Meanwhile, I'll focus my efforts on the other top-ranked stock on today's list.

The bull case for SandRidge Energy
As investments with bullish prospects go, natural gas probably isn't the first idea that leaps to mind. The U.S. Natural Gas (NYSE: UNG) ETF has tumbled since it peaked above $10 last month. But as CAPS member kkmidtx points out: "All investors are up to speed on the plight of natural gas," suggesting that any negative sentiments that could exist are already priced into SandRidge's stock. Our member's pitch continues:

Personally, I believe 2010 is the year for the correction, and [SandRidge] will obviously benefit from that. Besides they have been unable to market a large portion of their gas. That will change with the completion of the Century Plant (deal with [Occidental Petroleum (NYSE: OXY)]).

All-Star investor giftofgod agrees, pointing out that unlike gold and oil:

Natural gas is one of the few commodities that hasn't rebounded in a big way. However, the cost has recently doubled and is still very low right now. With the falling dollar, it is only a matter of time for this to outperform.

Last but not least, CAPS member DelRio78 beats a dead horse: "I think Sandridge is well below the entry point and could see 100% gains within months. The energy sector has a lot of built-in volatility, but I think Sandridge will be a major player."

In fact, you could argue that SandRidge already is a major player. The company boasts 1.3 trillion cubic feet equivalent of proven reserves (52% of which are natural gas), and a good 1.7 million gross acres on which to drill for more. While that's roughly 10% the size of Chesapeake's (NYSE: CHK) holdings, I still wouldn't recommend striking a match in the vicinity of SandRidge's reservoir.

Talk about "volatility!"
DelRio78 mentioned the volatility of energy companies, which raises an interesting point. You may have noticed that just one year ago, SandRidge told investors it had closer to 2.2  trillion cubic feet equivalent in the ground. Recent changes in the reporting rules for reserves, however, require the industry to use a 12-month average price for that calculation, instead of the traditional end-of-the-year spot price.  Because companies claim as "reserves" only what they can profitably extracted from the ground, low prices have not only diminished the value of SandRidge's reported reserves, but also also reduced the amount of reserves it can claim.

But this knife can cut both ways. A resumption of rising price trends would both increase the value of the company's reserves and the size of these reserves -- giving SandRidge a double dose of positive data.  For example, using the old method of end-of-the-year spot pricing, SandRidge would have recorded nearly 2.6 trillion cfe -- more than a 15% annual increase!

Time to chime in
The potential for such a beneficial "double whammy" may explain why so many Fools are so positive on SandRidge's prospects, even as the value of its key asset plumbs ever-deeper depths. Are Fools right to be so optimistic? Is natural gas poised for a rebound -- and will it carry SandRidge shares up with it?

Click over to Motley Fool CAPS now, and tell us what you think.