Drop-Dead Gorgeous Stocks

"The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade."

So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And out the other end comes a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even farther, and longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that recently hit their five-year lows:

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Friday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?
Each of the stocks listed above currently sits at or near its five-year low. Individually, they have shed anywhere from 30% to ... 76% (!) of their value over the past year alone. But while Wall Street's left 'em all for dead, Fools take a more nuanced view -- dismissing Data Domain, for example, while praising BlackRock Kelso (BRK) and Pioneer to the stars. And so it is that we've got two potential winners to choose from this week. Which to pick, which to pick?

We could look at Pioneer Drilling and why it deserves a healthy four-star rating. But I think I'd rather look at a little business development company that, while not technically at a five-year low (because it's only been public a bit less than two years) gets even higher marks from CAPS investors than Pioneer does. Welcome, Fools, to ...

The bull case for BlackRock Kelso Capital Corporation

• BRK went public in June 2007, but it took four months more before the stock showed up on investors' radar screens. AJL203PSU was the first CAPS member to write it up (that November), with the following brief introduction: "Blackrock's BDC. Newer IPO. Good Dividends. Should be good." (Hmm. In fact, the stock's down 73% since.)
• Of course, a skinnier stock often yields a fatter dividend. By March of last year, LuvABear was already praising BlackRock Kelso as "A strong corporation at a great current price per share and a yield of 14.33%."
• Fast forward to the present day, and EclecticRecluse recently highlighted the stock for making a "Large Move with Relatively Low Short Interest."

Why might that be significant? At the risk of putting words in EclecticRecluse's mouth, when a heavily shorted stock shoots up quickly, this could indicate the presence of a short squeeze -- a phenomenon that occurs when investors who have little faith in a stock are forced to buy it to cut their losses. In contrast, share price strength without simultaneous high short interest would suggest that a lot of people are truly turning bullish on the company. But should they?

Well, consider the points in BlackRock Kelso's favor:

The dividend
For one thing, the firm cut its dividend last week. While that may not sound like a plus, BlackRock Kelso makes an argument similar to those of recent dividend cutters General Electric (NYSE:GE) and JPMorgan Chase (NYSE:JPM) -- that this move will reduce "borrowings under our credit facility ... and ... preserve operating flexibility."

Whether you buy that argument or not, one thing seems certain: Now that the cut has already happened, it's unlikely we'll see another cut in the near future. And with BlackRock Kelso yielding 21% today (going forward), that makes for a mighty fine yield on what should be a pretty stable dividend going forward. Not as rich as the trailing yield at rivals Hercules Growth (NASDAQ:HTGC), Allied Capital (NYSE:ALD), or Apollo Investment (NASDAQ:AINV), granted -- but perhaps more sustainable. According to analysts who track the company, BlackRock Kelso should earn more than twice its new dividend payout both this year and next (and presumably, earn even more in years to come).

The valuation
What's more, even without any dividend at all, the stock's valuation entices. BlackRock Kelso appears to have $9.23 per share in tangible book value, or more than three times what the shares fetch on the open market. While I'm hardly an expert on business development corporations like BlackRock Kelso, I have to say that buying assets at a 67% discount to their worth sounds like a pretty good margin of safety to me. 

Time to chime in
To me, BlackRock Kelso Capital Corporation looks attractive both as a dividend play and as a play on hidden value. But is it "drop-dead gorgeous?"

You be the judge. Click on over to Motley Fool CAPS and tell us whether you think this one's a rock-solid investment.