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 and 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 based on past-three-month changes in institutional ownership, as reported on finviz.com. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Judging from the "star" ratings our CAPS members have assigned to these stocks, it seems investors are generally in agreement with Wall Street's pessimism over Sify and Yongye. In contrast, we're considerably more optimistic about Freeport, Transocean, and Lear -- and I have to say that I agree with the majority on all points this week.

Take Sify, for example. Investors aren't particularly enthusiastic about this Indian e-commerce company, and why should they be? Across 14 years of publicly filed financials, Sify has never generated positive free cash flow for any full-year period (it broke even in 2010, though). Its auditor just "declined to stand for re-election." Not a lot to like about that one.

Yongye? You know, I like the company, the business, and the financials. But I cannot lie to you -- I'm starting to get just a little bit tired of the stock's volatility and the constant "short" attacks. I own Yongye today, and it's a profitable position for me. But I'm seriously thinking about gathering up my winnings and hopping off this roller coaster.

On the other side of the coin, we have Freeport-McMoRan and Transocean -- two great plays on a commodities sector that's seen a good bit of volatility of its own. The folks on Wall Street may be net sellers, but from where I sit, both Freeport and Transocean look downright attractive. Both generate free cash flow superior to what they report as "net earnings" under GAAP . (Indeed, in Transocean's case, FCF exceeds net income by more than 3 times.) Both have modest, respectable dividends and are expected to keep growing over the next five years. I wouldn't sell either one.

As for the stock I'm most likely to buy, though, there's no question: It's Lear, hands down.

Nothing to fear at Lear
I admit that Lear is not an obvious choice. The troubles of investing in auto parts are well known. General Motors' (NYSE: GM) recent bankruptcy nearly brought the whole industry tumbling down with it. And yes, I could be just a Fool rushing in right here, as Wall Street heads for the exits. But when I look at Lear, I see nothing to fear -- and a heck of a lot to like.

Consider: Lear today sells for just a little more than 11 times annual earnings and is expected to grow these earnings at better than 11% annually over the next five years. That suggests that the stock's at worst fairly priced, and other numbers suggest it may even be a bargain. Numbers like:

• The company's $1 billion in net cash on its balance sheet.
• Lear's strong free cash flow, which backs up 96% of reported net income.
• The enterprise value-to-free cash flow ratio that results: Just 9.2.

Relative to projected earnings growth, that looks like a bargain price to me. And there's reason to believe Lear can do even better than Wall Street expects. You see, it used to be that we made and sold some 17 million cars and trucks annually here in the States. In 2009, that number shrank to just 10.6 million -- a level last seen in 1982. Last year, sales climbed to 11.8 million, but even that number remains 34% below peak 2000 sales.

Foolish takeaway
Seems to me that auto sales are practically guaranteed to climb in future years and,with them, sales of Lear's auto components. Moreover, since Lear sells to pretty much every automaker on the planet, it doesn't really matter whether Ford (NYSE: F) maintains its sales momentum, whether GM and Chrysler succeed in reinventing themselves, or whether Japanese automakers get their act together and come roaring back. Whoever wins the car battles downstream, Lear looks poised to profit higher up. At today's prices, I think investors stand a very good chance of profiting right alongside Lear.

Of course, that's just my opinion. If you disagree, I'm all ears. Head over to Motley Fool CAPS right now, and tell me why I'm wrong.