Contrarian Shopping List

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

Out of the quadrillions of quotations quarried from that most loquacious of quotationists, this one holds a special place in the hearts of Foolish investors. Are you looking to "buy low" so as to later "sell high"? If so, your best chance of getting that initial, low entry price comes when panicked sellers are unloading their shares at whatever price is on offer.

In today's column, we search the ranks of Wall Street's motivated sellers, noting which stocks they're most frantic to unload. Therein may lie the makings of a contrarian investor's shopping list. But don't take my word for it. Before you decide to go in through Wall Street's out door, check your thinking against the collective intelligence of Motley Fool CAPS investors.

Today's contenders include:

The problem with pessimism
The problem with going against the grain on Wall Street is that when professional traders are pessimistic, their outlook can become a self-fulfilling prophecy -- at least in the short term. The more desperate institutions become to abandon a stock, the lower the price they'll accept. And as their "ask" prices drop, the "bid" prices of buyers will fall in tandem, creating the very price decline they feared in the first place.

Until the selling stops.

In through the out door
When this year's autumnal stock squall will stop is anybody's guess. But until it does, savvy investors have a chance to be greedy and snap up bargains from fearful sellers (if bargains they truly be).

And where do such savvy stock buyers head to wait out the storm? Why, the sunny shores of Bermuda, of course! There they've found a savaged stock with a bright (one hopes) future in the form of credit default swapper Primus Guaranty.

The seven months that Primus has spent on the Motley Fool Global Gains scorecard have cost it 51% in market cap, but doesn't scare CAPS investors. On the contrary, a startling 98% of players polled predict Primus will turn around and trounce the market from its current lows. To find out why, we examine ...

The bull case for Primus Guaranty
Mimicking my own Foolish thinking, almost exactly in places, CAPS All-Star tuffsledding argues that with "conservative management, prudent fiscal practices, this company will emerge stronger and more competitive when the dust settles. Classic case of throwing the baby out with the bathwater during the recent carnage in financial stocks."

Back in March 2007, fellow All-Star MArgersinger said Primus was "an intriguing play in the recent beaten-down area of credit-derivatives. The management team is very smart here, taking risks only when deemed prudent. And the stock price is dirt cheap against the earnings power of the company." (And today's price is about 50% "dirt-cheaper" than it was in March.)

More recently (on Friday, in fact), yet another All-Star jumped aboard Primus. ngannet1221 mused:

I'd like to think this company's stock can only go up from $6.13 today, but as the ultimate contrarian (i.e., whatever I buy seems to immediately go down and whatever I sell seems to go up!), I won't be surprised if traders send this further down. Anyway my thinking is that the present crummy credit environment is creating opportunities that PRS management is savvy enough to jump on.

Interesting twist on the story -- one I hadn't considered. Accounting for "unrealized losses" pushed Primus into the red in its Q3 earnings report last Tuesday. But Primus isn't only a victim of the turbulent credit markets -- it's a player with the potential to profit from other cash-strapped victims.

With nearly $1 billion in assets and "cash, cash equivalents, and available-for-sale investments" making up 93% of its total assets, Primus seems well placed to make profitable plays in a financial market at wit's end. And with a stock priced at just 15 times trailing earnings -- which earnings, by the way, analysts expect to grow 23% per year over the next five years -- Primus looks priced to move.

Time to chime in
Of course, the aim of this column isn't to tell you what I think about Primus Guaranty -- or what other CAPS players are saying. We also want to hear your thoughts on this, or any other company on today's list. If you've got an opinion, we've got a place to voice it.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.