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 selloff 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, and buyers' bid prices 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 Thursday. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
Up on Wall Street, traders are dumping these stocks just as fast as they can. But down here on Main Street, each still has its fans.

Take Valhi, for example. It's a diversified conglomerate involved in everything from pigments to pin-tumbler locks, not to mention waste management. And CAPS member dermagenex thinks it's Door No. 3 that holds the key to Valhi's success: "nuclear energy is the future. The only roadblock to nuclear has been 'what to do with the waste?'" [and] … VHI is on the verge of taking care of it," having secured a license to open a radioactive waste disposal facility in Texas early next year.

Sound good? Well, according to drobuck340, the story at Pozen is even better. This one's a "great stock," and it seems the Food and Drug Administration agrees. On April 30, the FDA gave Pozen's arthritis drug Vimovo its stamp of approval, triggering a $20 million milestone payment from partner AstraZeneca and, in the minds of some investors, setting the stage for a buyout.

Regardless, most investors on CAPS remain skeptical of unprofitable Pozen and debt-laden Valhi. Whom do they prefer, you ask? Ethernet equipment maker …

DragonWave
More specifically, debt-free, cash-rich, and profitable DragonWave. CAPS member adammcnamara says the company boasts "solid fundamentals and a superior product in a growing market," yet "investors are nervous about the prospects of more sales for their carrier equipment outside of ClearWire (Nasdaq: CLWR)."

Should they be nervous? Weak guidance in the most recent quarterly report suggests that the answer is "yes," but according to RoachFool, DragonWave's "microwave radio is the most efficient and cost effective method of performing the backhaul function in connecting cell towers with the internet backbone. Dragonwave makes the best radios. … Clearwire is extremely satisfied with Dragonwave radios."

So far from worrying about losing the ClearWire contract, perhaps investors should be looking toward the day when DragonWave begins signing up ClearWire backers, such as Comcast (Nasdaq: CMCSA), directly? And if not them, CAPS All-Star brianpivar believes DragonWave could secure contracts from "AT&T (NYSE: T) and Verizon (NYSE: VZ) [but] even if they don't get the contracts this stock should still be at $14 by the end of the year."

Now, why might the stock rise in the absence of new contracts?

Growth is good, cheap is better
At the risk of being blunt, because DragonWave is cheap, cheap, cheap. Selling for roughly 7 times earnings today, and for 12.3 times forward earnings, DragonWave looks vastly underpriced relative to analyst expectations of 20% long-term growth. The company also recently turned free cash flow-positive, generating nearly $25 million in free cash flow over the past 12 months (giving it about an 8 multiple to free cash flow.)

Foolish takeaway
With $112 million already stashed in the bank at DragonWave, and more pouring through the door, it looks as if the company's real problem may be figuring out where to put all the money it's making.

But that's just my opinion. If you think the situation with ClearWire's worse than our CAPS community believes, here's your chance to warn them off. Head over to Motley Fool CAPS now, and tell us why we really should fear the Dragon.