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 low list at Nasdaq.com:

Companies are selected from the "NASDAQ 52 Week Low" list published on Nasdaq.com on the Saturday following close of trading last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Knives and knaves
If there's one good thing about a broad-based market sell-off, it's that you find a lot of terrific companies getting the ol' baby 'n' bathwater treatment. Tossed out on their rosy little bums as if they were bums of another sort. You know -- just know -- that some of these babies are gonna bounce right back once the suds subside.

Fishing around in the wash this week, CAPS players have held Arden Group's head above water, keeping it at three, four, or five stars for the past six months. And thank goodness they've been Johnny-on-the-spot, because I'd have entirely mistaken the stock for Elizabeth Arden (NASDAQ:RDEN).

Seriously -- I'm just that dumb. In fact, Arden Group has much more in common with marquee supermarket names like Safeway (NYSE:SWY) and Kroger (NYSE:KR) than makeup makers like Revlon or Estee Lauder. Let's give the floor to a few Fools who can tell us more.

The bull case for Arden Group
We'll start with a brief introduction to the company, penned by CAPS All-Star pencils2 late last year:

Through its subsidiaries Arden-Mayfair and Gelson's Markets, operates 18 higher-end supermarkets in Southern California. The company also owns some real estate properties through its subsidiary, Mayfair Realty ... Company has been growing earnings at a very quick pace lately... Cash flow production is consistent and increasing and is fueling the business's growth... The company has been able to pay a consistent dividend every quarter since 2003 as well... Despite the company's superb financial growth and strong fundamentals, no analysts follow the stock. Wall Street doesn't know who the Arden Group is!

Fellow All-Star Marcus87 soon added:

I love a company with heavy insider ownership. Owner Bernard Briskin owns 57% of outstanding shares! If he believes in this company I think I can too.

Finally, let's end with this April 2007 pitch from talkingmonkey, who (at least talks as if he) knows the company firsthand

The company's main focus since 1951 is owning and operating a chain of high-end specialty grocery stores... [T]he company has been delivering nothing less than super premium products and services to discerning customers living mainly in Southern California's super premium locations... [N]ow that Whole Foods (NASDAQ:WFMI) has gobbled up Wild Oats, Gelson's (Arden) seems a prime candidate to take over that coveted No. 2 position as the only other premium full-service grocer worth mentioning in Southern California.

Now considering that these pitches all date from last year, a bit of updating seems to be in order. Here's what I get when I look at Arden Group (again, not Elizabeth Arden) today:

The first thing that strikes me is that pencils2 is absolutely right. Not a single analyst follows Arden Group -- but perhaps they should. The company scores better gross and operating margins than Whole Foods, yet sells for a P/E half that of its higher-profile (and 10-times-bigger) rival. From a free cash flow perspective, Arden looks almost as cheap, trading for 14 times trailing free cash flow. It also carries net cash (cash minus debt) of $86.5 million, compared to Whole Foods' net debt of $769 million.

Valuing this business is a bit tricky, because "no analysts" means ... no analysts crunching the numbers and giving us earnings estimates. But if Arden Group can maintain the 17.5% compound annual growth rate it's posted over the past five fiscal years, this stock could be significantly undervalued today.

My conclusion: Arden is an honest-to-goodness candidate for a "bounce."

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Arden Group -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.