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 -- 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 and CAPS ratings from Motley Fool CAPS.

History repeats itself
Up on Wall Street, the pinstripe-and-wingtip crowd can't sell these stocks fast enough. But what amazes me is how, to a very great extent, the stocks Wall Street is selling today are the same stocks it's been selling all month long (and as we're about to see in one case, even longer). Once again, we find each of STEC and Brocade, H&R Block and Palm in the doghouse. Shunned by the Market's Wise Men. Sold off as if they've no chance to ever rise again.

But if you ask the 160,000-plus Fools rating stocks on CAPS, that's a bit too pessimistic a prediction to be making about these companies. Already, sentiment is starting to turn around for STEC, for example. Already it has turned around for Brocade -- and perhaps rightly so.

Because as we see today, the single stock topping our list this week was also right here one year ago -- and the last time this happened, it turned into a double.

The bull case for Methode Electronics
Does Wall Street's pessimism (and investors' optimism) mean Methode Electronics will double again? Many Fools believe so. Writing a year ago, CAPS All-Star SeekingReturns called the company's dividend safe in light of its "good cash position, little debt, etc." Fellow All-Star ferrariedgardo echoed and amplified the point a couple of months before that: "Great cash position, solid cashflows and dividend."

And yet, things have taken something of a turn for the worse at Methode since those comments rolled in. Yet another of our All-Star investors, SmallCapsInvstr, warned us last May that Methode was: "Going through a tough 2009 that may continue into 2010 ... [bleeding] through half their cash through 3 quarters in 2009." Yet still: "Luckily management did a very nice job of building cash flow in the past so they should be able to withstand the tough times ahead. A very nice margin of safety on this one even if 2009 FCF levels remain where they are."

Nail, meet hammer
And Fools, I fear SmallCapsInvstr may have hit the nail on the head with that last comment. One year after I first tagged this company as a likely outperformer, there's still a lot to like about this company. Methode's customers in the auto industry are starting to pick up speed again, with Ford (NYSE: F) in particular having just reported a banner sales month for February. Chrysler, too, is posting sales gains -- and the worse things get for everybody's favorite punching bag, Toyota (NYSE: TM), the more likely we'll see further gains among Methode's domestic customers.

Methode's dividend remains intact at $0.28 per share, giving shares a 2.8% yield at the moment. Best of all, Methode made good use of the strong free cash flow that I made the centerpiece of my argument last year. As of today, Methode boasts a balance sheet even stronger than it looked one year ago, brimming with $57 million in net cash.

My problem with Methode is that I'm not sure how long this can continue, because of what I see happening on the cash flow statement. Consider: One year ago, Methode was reporting profits and generating free cash flow in excess of $45 million. But the last few quarters have seen steady deterioration at Methode, to the point where it's now reporting just $8.1 million in free cash flow for the last 12 reported months. Suffice it to say, the trend does not look good.

Time to chime in
Much as I hate to join with Wall Street in the pessimists' column, Methode Electronics' numbers today don't inspire the same level of optimism -- and greed, even -- that struck me when I first reviewed the company one year ago. Divided into the company's current market cap, $8.1 million results in a price-to-free cash flow ratio of nearly 45 for this stock, which seems to me an awful lot to pay for Wall Street's predicted 15% long-term growth at Methode.

When you get right down to it, the more I look at Methode today, the more I'm inclined to say: "Thanks for the 100% profits, but I'll be leaving now," and cash in my chips.

Disagree? Feel free. Click on over to Motley Fool CAPS, and tell us why.

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