Get Ready for the Bounce?

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) 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. That's where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

Knock, knock
Who's there? If you ask most CAPS members, it's Opportunity with a capital "O." With the notable exception of Starwood, Fools think the hard times these stocks have fallen upon are only temporary. They're bound to bounce back, and when they do, fearless Fools today are poised to reap the rewards tomorrow.

Who will bounce highest? In the opinion of our 145,000 (and growing) lay equity analysts, the best prospects lie with Chinese electric utility Huaneng Power. Let's find out why, as we dig into ...

The bull case for Huaneng Power International
CAPS member dp23peace kept the bull thesis simple in a pitch dating from last summer: "As China recovers more electricity will obviously be needed. But, where oh where can they get it from? [Huaneng Power] is one who will be ready."

CAPS All-Star maxhoffa agrees, and advised in March that "you (or at least I) can't just ignore the huge Red market and a power grid that will be expanding over the next 2 decades or so. [Huaneng Power] is proven and positioned."

But beware. As far back as 2008, fellow All-Star saunafool was warning that Huaneng is "going to continue getting pinched by high coal prices. However, the Chinese government recently raised the price of gasoline, and eventually they will logically have to raise the price of power. When? I don't know."

But one year later, we do now know when the rate hike will happen. Just one month after saunafool penned that pitch, China raised electricity rates 5% -- and it did so again just last month. With businesses in China paying just $0.034 per kilowatt hour, versus an average of $0.104 per KwH in the U.S., it would seem there's still plenty of room for businesses to pay more -- so is now the time to buy, and profit as the rate hikes come through?

Trust, but verify
You'd think so, right? But in fact, Huaneng hasn't really benefited much from last year's hike. It may be reporting profit and paying a respectable dividend, but over on the cash flow statement we find Huaneng still generating electricity by the inefficient means of burning cash. Free cash flow has run to negative $1.8 billion over the last 12 months, a near-doubling of the average $980 million in annual free cash flow that Huaneng has burnt through over the last five fiscal years.

Maybe it's me, but this seems to me a crazy way to run a business. Then again, I suspect there's method to the madness. In a state-run economy like China's, any gain Huaneng might receive from being allowed to charge market rates on its power might be undercut by lost profit and shuttered factories across other Chinese industries. To my Foolish eye, this is a fate that the Chinese government will do anything in its power to mitigate. And while that's good news for Chinese GNP -- it's bad news for Huaneng Power shareholders.

Foolish takeaway
It seems to me that the bull thesis for Huaneng Power has tripped a breaker. From an income investor point of view, I see no reason to buy Huaneng for its 2.7% dividend when you can get 4.5% in the U.S. with an investment in Dominion (NYSE:D) for example -- or 5.5% at Duke Energy (NYSE:DUK). And while I agree that "China needs power," I don't believe that you must own Huaneng to capitalize on that requirement.

CAPS is overflowing with Chinese energy ideas rated nearly as well as Huaneng -- Suntech Power (NYSE:STP) and Yingli Green Energy (NYSE:YGE) in solar, for example. Or PetroChina (NYSE:PTR) and CNOOC (NYSE:CEO) in oil. (For that matter, these last two both pay dividends higher than Huaneng's!) So even if Huaneng won't bounce, I suspect if you look hard enough, you just may find another stock that will.

What's that? You've already found one? Great! Click here to tell us your favorite China play.

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