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 our 130,000-member Motley Fool CAPS community.

Today's contenders:

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 are selling these stocks just as quick as they can. Down here on Main Street, we're pretty jaded ourselves on the prospects of SLM Corp. (aka Sallie Mae) and HSBC (a financial firm), but Foolish investors aren't nearly as worried about GMX or Abraxis. And we're downright enthusiastic about Madeco S.A.

Madeco isn't exactly a household name here in the U.S., but just because you've never heard of its products, doesn't mean they aren't in, around, and outside your home. Madeco, you see, manufactures and sells a whole range of mundane-but-essential products, from copper pipes, to aluminum window frames, to the packaging around foodstuffs. If your grocery trips bring home products manufactured by Kraft (NYSE:KFT), PepsiCo (NYSE:PEP), or Procter & Gamble (NYSE:PG), you're probably a Madeco customer, whether you know it or not.

The bull case for Madeco
While product packaging makes up nearly 20% of Madeco's sales, and is its most profitable product segment percentage-wise, investors continue to view the company primarily as a play on copper. In January, CAPS All-Star Schmacko noted: 

Their ... largest revenue earner is their Brass Mills section which is invovled in the very unsexy business of manufacturing pipes, sheets, coins. ... Their primaray raw material is copper, which is at 4-5 year lows currently.... The Chilean peso is also at lows to the dollar not seen since 2003-2004, which makes Chilean goods cheap comparatively so can be good for an exporter. ... With their debt being drastically reduced, primary material cost going down, the fact that they are export driven, and a dividend payout coming very soon I don't feel too bad green thumbing this on caps at this price.

Likewise, in January TelecomJohn argued that Madeco is "well positioned in copper, and relatively cheap. I'd like to see some of that debt paid down." And last but not least, in December, CAPS member 82882 put the bull thesis succinctly: "P/E ratio 0.86." 'Nuff said.

Not so fast
OK, maybe not enough. Before I let this particular Fool fave out the door, let's quality-check a few of the above statements, starting with that assertion about Madeco's cool price-to-earnings ratio. Forgive my bluntness, but it's illusory: last year's sale of the firm's wire and cable business vastly inflated reported earnings. This cash influx also plumped up free cash flow to the heady level of $45.7 million last year. These numbers make the company look a lot cheaper and healthier than it really is.

Madeco's more usual business practice is to report GAAP profit while burning cash. While it has filed accounting earnings since 2004, it has never had annual positive free cash flow in that period -- except in 2008, as noted. The stock has been smelted: Its shares now trade for less than they fetched five years ago.

Balancing the odds
That said, for all the inefficiency of its business, there are arguments in Madeco's favor. For example, TelecomJohn's wrong about Madeco needing to pay down debt. In fact, the company's balance sheet currently shows $223 million in cash and short-term investments, alongside nearly $196 million more in long-term investments, versus just $32 million in long-term debt. Tally those figures, and you've got yourself a company whose market cap ($266 million) is less than the value of its net cash and investments ($387 million).

Seems to me that sometime, somebody should be able to find a way to turn this math into a winning proposition for Madeco shareholders, if by no other way than simply liquidating the company and distributing the proceeds to shareholders. There's little reason to expect Madeco will remain valued at less than 0.4 times book value forever -- and every reason to believe some smart investor will figure a way to make money from this company eventually.

Time to chime in
That said, the aim of this column isn't just to tell you what I think about Madeco. I'd rather hear your thoughts. Are you fearless enough to invest in a possible turnaround at Madeco? Click on over to Motley Fool CAPS and tell us what you think. Participation in CAPS and access to all the information it offers are totally free.