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 and note which stocks they're most frantic to unload. Therein may lie the makings of a contrarian investor's shopping list. But don't just 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 get pessimistic, their grim outlook can become a self-fulfilling prophecy -- at least in the short term. The more that institutions become desperate to abandon a stock, the lower the price they'll accept to get rid of it. And as their "ask" prices drop, the "bid" prices of buyers will fall in tandem, creating the very price decline that they feared in the first place.

Until the selling stops.

In through the out door
When it will stop is anybody's guess. But until it does, savvy investors have a chance to "get greedy" and snap up some bargains from these fearful sellers (if bargains they truly be). This week, investors believe they have found a steal of a deal in the stock of seafood server McCormick & Schmick's. Better than nine out of 10 investors polled on CAPS -- and all 17 All-Stars on record -- think this one's a buy. Let's find out why that's so.

The bull case for McCormick & Schmick's Seafood Restaurants

• ShuntSD leads off with a qualitative argument, praising McCormick & Schmick's "Great food, great locations and an excellent reputation." But that's not all: "Growth should be steady and margins are healthy. Fills a niche that has no real dominant player."
• What niche would that be? tnevhsc says, "This company will grow steadily partially because targets a less volatile wealthier clientele." And tnevhsc agrees with ShuntSD that "they also have lots of growth potential."
• But if things are so great for the company, why is its stock on this list? EnigmaDude observes that a "lower 3Q earnings forecast" is to blame. But EnigmaDude believes that as a "great restaurant brand," the stock "should recover after the dust settles."

At first glance, I'm inclined to agree with the three pitches above. With a trailing P/E of 18 and profits growth projected at 20% per year over the next five years, McCormick & Schmick's sure looks undervalued. But closer examination does reveal some cause for worry.

For one thing, at just under a half-million for the last four quarters, free cash flow sits significantly below reported net income. This restaurant will have to grow a whole lot faster than just 20% per year to justify the resulting price-to-free cash flow ratio, or find a way to get its cash profits to better resemble its GAAP numbers.

Also disturbing -- margins may be "healthy" in the sense that they're at least positive. But the firm's 16.1% gross margin and 6.5% operating margin look wan when compared to the averages prevailing in the restaurant industry. I'd expect better from a supposed premium player serving "wealthier clientele." Long story short, I'm not buying this story just yet.

Looking for a better restaurant play? At the Fool's small-cap investing newsletter, Motley Fool Hidden Gems, we've found a little chicken wings purveyor that we think will set you to drooling. Find out who it is and why we like it when you taste-test the service free of charge.