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.

Up on Wall Street, the investment bankers just can't unload these stocks fast enough. And truth be told, Fools aren't all that keen on them either -- with one exception. Locking on to the trend of DVDs-out, video-on-demand-in, investors are placing their bets on digital video specialist SeaChange International.

It's a risky bet, to be sure. SeaChange is a small fish in a big pond dominated by giants like Cisco (NASDAQ:CSCO) and Sony. Can SeaChange swim fast enough to avoid being eaten? Let's find out.

The bull case for SeaChange International 
CAPS All-Star RuleBreakerGoog thinks SeaChange has real swim-ability:

The company is reportedly gaining ground in India through IPTV offerings and generating considerable interest in other emerging markets in Eastern Europe / Asia. The On Demand paradigm has yet to be fully leveraged in any market including the US; while not in its infancy, it is certainly no more than a toddler. If it becomes the primary way to view TV content, this company is well positioned to be the major player is software and systems through the paradigm's adolescence.

uptick4life noted in March that: 

Business models in the music and film and studio industry industry will change, must change to remain profitable. Free content is readily available through file sharing and the like. SeaChange will facilitate the availability of this free content over IPTV and include the ability of providers to include Internet-type targeted ad sales as the new model of revenue generation for these entertainment concerns.

And in fact, EnigmaDude points out that the change is already under way, pointing to news that Comcast (NASDAQ:CMCSA) has signed a "new software subscription agreement" with SeaChange, and predicting an "[i]mproved second half driven by continued [video on demand] strength."

Comcast may be SeaChange's latest contract win, but it's not the only one. This tiny company also counts such industry stalwarts as Cox, Time Warner Cable, and Verizon (NYSE:VZ) among its stable of customers. And while it's true that the stock hasn't done well in the last two months, in the long term the professionals see a lot of promise in SeaChange. The consensus of the trio of analysts who follow the company is that SeaChange could post 35% compound annual growth over the next five years -- more than enough to justify the firm's 27 P/E ratio.

But the company could be even cheaper than that. You see, under GAAP accounting rules, SeaChange reported $8.8 million in "net earnings" over the last 12 months. Yet in fact, this firm generated free cash flow of more than twice that amount -- $22.9 million. This gives the stock a bargain basement valuation of roughly 10 times its annual free cash, and that free cash has surged in recent years.

To my mind, if Wall Street is anywhere near the mark with its prediction of 35% long-term growth, this stock is vastly underpriced. And when you add in the fact that fully one third of its market cap is composed of cash in the bank ($80 million, versus no long-term debt), the stock looks cheap beyond belief.

Time to chime in
Then again, when a story looks too good -- it behooves investors to inquire: Is it just a fairy tale? You've heard what SeaChange's boosters think. You've read my response. Now it's your turn to tell us what you think about SeaChange.

Punch a hole in this bull thesis. If you can.

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