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 -- and whether you should buy 'em:

Companies are selected from the "Institutional Ownership Down Last Month" list published on MSN Money after close of trading on Thursday. Recent price and CAPS ratings from Motley Fool CAPS.

Wall Street vs. Main Street
Up on Wall Street the pinstripes-and-wingtips crowd are unloading these stocks just as fast as their manicured pinkies can tap the "sell" button. Down here on Main Street, though, each still has its fans.

Take Liz Claiborne, for example. While admitting that the company "Hasn't turned profitable again yet," CAPS All-Star bg11235 has noticed that "cash flow has been improving," and expects this is a harbinger of good things.

Or consider the case of Cray. All-Star investor WPThatcher points out that the company's $2.67-per-share "Cash hoard provides downside protection" on this $5-and-change stock. And 21popsontop cites a string of recent contract wins that have Cray management now predicting "2nd and 3rd quarter revenue guidance above analyst forecast."

Regardless, the widespread sentiment on CAPS is that these two are mediocre bets at best. Meanwhile, some of the best investors on CAPS see greater potential in another company with much less name recognition than either supercomputer-maker Cray, or fashionista Liz. Its name …

Blue Coat Systems
While admitting that: "This tech stock does not get the attention of an Apple (Nasdaq: AAPL), Cisco Systems (Nasdaq: CSCO), or Microsoft (Nasdaq: MSFT)," All-Star investor rwadington thinks it perhaps should: "[Blue Coat Systems] is growing its earnings at a torrid clip and is poised for another strong year. Forget the names that are always in the news and get onboard this one: the train will be taking off soon!"

Fellow All-Star TheGarcipian observes that Blue Coat boasts "marginal RoA & RoE, but quarterly growth of 16% (Revenue) and 550% (Earnings), debt is less than 10% of Market Cap, and they hold more cash than short-term debt (so not bad at all)."

So why's the stock down so hard? CAPS All-Star legend TSIF lays it out for us: "Blue Coat forcast $0.35 to $0.40 next quarter. Analysts were expecting $0.40. So reduced guidance, but a very good quarter. ... Revenue the last two years has more than doubled, although little has made it to the bottom line as R&D and sales expenses also are growing. Cash flow has been very good." TSIF has a lot more to say, so check it out.

You got my attention there
Seems Blue Coat closed out its fiscal year in April with $42.9 million in profits, a nice turnaround from the previous year's loss. But as TSIF points out, the real success story here was free cash flow. Reining in capex helped Blue Coat generate some $79 million in cold, hard cash last year -- a good 84% higher than what the income statement would lead you to expect.

On a $953 million market cap, this works out to a price-to-free cash flow ratio of just 12. If you net out the company's copious cash cache ($159 million in net cash on the balance sheet), the enterprise value-to-free cash flow ratio looks more attractive still: barely 10. All this for a company that -- even after the reduced guidance that spooked the Street -- is expected to grow earnings north of 15% per year over the next five years. (Interestingly, that's faster than two out of the three companies that rwadington lamented as getting too much "attention" up above. Only Apple's expected to grow faster than Blue Coat.)

Time to chime in
To me, this sounds very much like an undiscovered -- or at least unloved -- stock, poised to outperform its more popular rivals. But don't take my word for it, or even the word of the three uber-successful investors I've quoted above. Take a gander at Blue Coat for your own self. "Try it on for size," so to speak -- then tell us what you think.