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.

Wall Street is dumping these stocks like the proverbial hot potato. And Main Street investors? "Thanks, but no thanks," we say. "We're on Atkins."

But water's got no carbs, right? So Mueller Water Products should be a safe place for dieters and investors frightened by a recession alike, right? Well, let's find out.

The bull case for Mueller Water Products
Wijilly introduces us to the company, which counts Home Depot (NYSE:HD) and American Water Works among its customers:

Mueller is a well known quality water fixture supplier. As long as buildings are going up, Mueller will be cashin in. Certainly there is less construction at the moment, but soon we are going to see more as our new stimulus plans are put into action.

Maybe. But maybe may be good enough for All-Star CAPS member TSIF, who lays out the bull thesis for Mueller thusly:

The US plumbing, piping, buildings, all need 'fixed' even if the 'give it away' package doesn't keep the municipal parts of the package. Mueller ... made a profit [last] quarter and is aggressively 'right sizing'. Large inventory is available when recovery does start. Cash position is better than it has been. Debt is manageable.

Possibly. It's worth noting that the firm is more than twice as heavily leveraged as larger, better-funded rival Tyco (NYSE:TYC).  Chiming in with the rest of the chorus is fellow CAPS All-Star HansHauge, who agrees that Mueller's in the right business at close to the right time: "Being tied to construction is not exactly the most favorable thing right now, but water is always a basic need. No amount of recession will put the plumbing industry out of work."

Keeping the big picture in mind, I'd say I agree with our CAPS contributors this week. We do need water. We do need the infrastructure to pipe it into our homes, and the fixtures to release it from the tap. And if the government's new stimulus package floods Mueller Water with new business, that could be very good indeed for shareholders.

But what if it doesn't?
Then -- to paraphrase a certain ex-secretary of defense -- we've got to go to market with the numbers we've got, not the numbers we wish we had. And Fools, Mueller's numbers just don't look very good to me right now. The company just closed out a miserable calendar year in which the last quarter's impairment charge erased many years' worth of historical profit, and plunged Mueller into a $387 million bath of red ink.

Nor does the cash-flow picture look much better. Although Mueller generated positive free cash flow in the last 12 months, this still amounted to less than $27 million, giving the firm a trailing enterprise value-to-free cash flow ratio of 52. Call me a hydrophobe if you like, but that valuation just doesn't seem sustainable in light of analyst expectations of 9% long-term profits growth at Mueller. With a massive debt load, minimal and weakening cash flows to support it, and limited growth prospects in its future, Mueller looks like pretty weak tea to me.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Mueller Water Products -- or even what other CAPS players are saying. We really want to hear your thoughts. Is there more to Mueller's business than meets the eye? Or even if there isn't, will the stimulus package ride to Muller's rescue? Click on over to Motley Fool CAPS and tell us what you think.

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