Contrarian Shopping List

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." 
 -- Warren Buffett

Of all of 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 buy stocks on the cheap.

In the short term, professional traders' pessimism can become a self-fulfilling prophecy. When desperate institutions lower their asking prices to get rid of a stock, buyers' bid prices fall in tandem and create the very price decline that both sides feared in the first place -- until the selling stops.

Until it does, savvy investors can "get greedy" and snap 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 contrarian picks, we'll check them against the collective intelligence at Motley Fool CAPS.

Today's contenders include:

Investors continue to be leery of the financial sector. In today's list of Wall Street rejects, we find financials garnering the only two below-average ratings. Fortunately, that stigma doesn't attach to our lone four-star stock -- Omrix, a commercial-stage biopharmaceutical company ... and a Motley Fool Rule Breakers recommendation. Investors hooked in to our hypergrowth newsletter will already know why we like this one. Today, let's see what the rest of investor-land has to say about the company, as we review ...

The bull case for Omrix Biopharmaceuticals
NetscribeBiotech introduced us to Omrix a year ago:

Omrix Biopharmaceuticals ... utilizes its protein purification technology and manufacturing know-how to develop biosurgical and passive immunotherapy products. ... Omrix's biosurgical business is likely to be the key catalyst that will drive company's growth. [Omrix's] partner Johnson & Johnson (NYSE: JNJ) is marketing Evicel and Crosseal in the U.S. ... and Quixil in Europe ... for ... hemostasis. ... Omrix's, biosurgical franchise shares a lot of synergy with [Johnson & Johnson]. ... Thus the company can be a target for a takeover from [Johnson & Johnson]. ... As a matter of fact [Johnson & Johnson] did try to buy Omrix when it was a private company.

Expanding on the competitive landscape, the Fool's own TMFBreakerThiel, a Rule Breakers team member, warns us to "[w]atch out for Zymogenetics (Nasdaq: ZGEN), which is close behind with a competitive product."

TMFBreakerThiel wrote that back in October 2006. Prescient words, indeed: Omrix's stock took a dive early last month, and egenesis says the drop was probably a result of competitor [Zymogenetics'] approval for thrombin. But egenesis goes on to predict that Omrix "will probably capture at least some of the thrombin market since [the] product is marketed by J&J, plus their surgery product [Evicel] was just expanded to general surgery which will also increase profitability, and [the] best may yet to come with the innovative [Fibrin] patch [to treat] severe bleeding and [Adhexil] for adhesion prevention now in clinical trials."

So to summarize, we're looking at a profitable biotech, potentially a buyout target, with loads of cash on hand and significant insider ownership. Now, I don't claim to be a biotech expert, and I can't speak to the chances of a buyout. But at first glance, the stock's trailing price-to-earnings ratio of 17 looks pretty attractive against its projected 20% growth in earnings.

Sure, I'd prefer to see the company generating free cash flow -- which it isn't. But cash from operations is just shy of breakeven over the past four quarters, and it is selling product, and it does have net income. In the field of biotech investing, where cash arsonists and unprofitable companies seem to be the norm, things could be a lot worse than this.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Omrix Biopharmaceuticals -- or even what other CAPS players are saying. We really want to hear your thoughts. Is Zymogenetics as big a threat as it seems? Does it give you pause that Omrix's CFO jumped ship last month? Click on over to Motley Fool CAPS, and tell us what you think.

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