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. 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 from the "Institutional Ownership Down Last Month" list published on MSN Money on the Saturday following close of trading last week. Recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Banks and similar gambling establishments are in disfavor this week, with everyone from Regions Financial to MGM Mirage scoring a disappointing two-star rating on CAPS. The sole exception to this rule, interestingly, is also a "financial" stock of sorts: Apollo Investment Corporation.

An entity often referred to as a "business development company" (BDC), Apollo's stock in trade is making loans to companies in need of cash, as well as investing directly in the equity of such clients. So basically, it's in the same business as the infamous Blackstone (NYSE:BX) or Allied Capital (NYSE:ALD). Of course, with headlines dominated by news of companies laying off workers and filing for bankruptcy, now might not seem the best time to be in the business of loaning money to such troubled children -- or owning their stock. The terrible business environment isn't scaring Foolish investors away from Apollo, though. Let's find out why.

The bull case for Apollo Investment
SeekBalance introduced us to Apollo back in April 2008, writing: 

The entire financial sector has been slaughtered in the first four months of '08. And yet, there are some fine companies out there who have solid loan portfolios, little or no exposure to residential mortgages, very nice balance sheets, high and probably sustainable dividends, decent growth rates, and low P/E and PEG ratios. [Allied Capital, Apollo Investment, and CapitalSource] ... make business loans to growing medium sized companies... All three seem to have strong management teams that have not panicked during the recent financial meltdown, and all three have cash, the ability to raise more, and an eye toward scooping up bargains while their sector is distressed.

onegoodguy521 likes Apollo's "strong revenue stream," and believes its "dividend yield should attract investors." Another case in point: basilisk333 wrote last fall that "this is a solid 'financial' stock with a high, dependable dividend ... When everything else which has unfairly been beaten down due to the recent alleged 'crisis' recovers, [Apollo Investment] will follow suit. This is a good long-term value stock due to its high dividends."

"High," of course, is a relative term. And the height of Apollo's dividend got relatively smaller earlier this month when a truly miserable Q3 earnings season convinced management of the need to cut its dividend in half.

And yet, this still leaves Apollo paying out 22% of its own market cap to investors in the form of annual dividends. Considering that the long-term growth rate of the S&P 500 is itself just 10.5%, I have to say that the prospect of doubling that return on dividend payments alone -- let alone any capital gains -- sounds awfully appealing. The question, of course, is whether such a high level of dividend yield is sustainable.

It just might be. The new payout calls for Apollo to mail out $1.04 in dividend checks this year. Analysts expect the firm to earn $1.48 for the year ending this March, and $1.42 the next year. In each case, therefore, Apollo appears to have picked a new dividend yield that its operations can support, if the analyst estimates are right.

As for the company itself -- well, I'm hardly an expert on BDCs, but what I see here looks pretty good. Tangible book value amounts to nearly $10 a share, yet the stock itself sells for barely half that sum. Seems to me that if the book value bears any relation to reality whatsoever, Apollo Investment Corp. carries a sizeable margin of safety between what investors are willing to pay today, and what management could return to shareholders if it closed up shop, liquidated its assets, and returned the cash to shareholders tomorrow. For long-term investors willing to accept a mere 22% dividend in compensation for their patience, this one looks intriguing.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Apollo Investment -- or even what other CAPS players are saying. We really want to hear your thoughts. Are Apollo's assets as sound as they look? Or does the firm's business model perhaps give you pause? Click on over to Motley Fool CAPS and tell us what you think.

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